An article is circling the web and the mainstream media this week, reporting that one in three Americans have no money saved for retirement. The findings support a claim that I have made many times on this blog, that the average person is not in a position to enjoy anything that looks like full-time, permanent retirement.
Does that mean that millions of people are doomed but a retirement comes around? They don’t have to be, but it will require taking some extraordinary steps between now and the day they hope to retire.
Under-preparation for retirement is a big problem the whole world ‘round, and it’s not always the fault of the individual. People spend years slogging away through a challenging career, having families, having fun, traveling, etc. They wake up one day, they’re 55, and they realize they have next to nothing in their retirement account. This is a tough spot to be in. Even though this isn’t the end of the world and there are still strategies that can be implemented, you won’t have the benefit of the time value of money if you are getting close to retirement and have little to nothing saved and invested.
But in another way, time is your best friend when it comes to investments of nearly any type. Because it’s nearly impossible to get rich quick, investments that grow well, grow slowly. If you happened to start early, and make regular contributions all the way, you will be all set for a comfortable retirement. But if you, like most people, did not, you’ve got to make some other plans, and take the kind of drastic action necessary to pull off the retirement you hope to have.
Here are a five ways you can make that happen.
1. Save Whatever You Can in an Employer-sponsored Retirement Plan
If you have little or no money saved for retirement, there may be a tendency to throw up your hands and say why even bother trying? But try you should, no matter how late in the game it might be.
Get into a 401(K) at work if one is available, and undergo a pension review to see what your best options are. Sometimes it’s very helpful to get a professional’s thoughts on your 401(k) structure. Because these funds grow with markets, and are the result of routine contributions, often with matched funds from employers, it’s imperative that you have a good plan set in stone well in advance of your actual retirement – the sooner the better. If you’re starting late in the game you can’t afford to make mistakes.
Here’s the point – let’s say that you’re 50-something, and you don’t have time to amass a million-dollar retirement portfolio – you may still have time to build a $100,000+ sized portfolio. And that will be a lot better than having nothing at all.
2. Set Up Personal Retirement Investments
If you aren’t covered by an employer-sponsored retirement plan, definitely look into an IRA and take advantage of it. IRA’s don’t have the high contribution amounts that 401(k) plans do, but you can still save as much as $5,500 ($6,500 if you’re age 50 or older) each year between now and the time you turn 70 1/2. And if you are not covered by an employer plan, your IRA contributions should be tax-deductible.
You can also look into a Roth IRA, which has the same contribution limits as a traditional IRA. The short-term disadvantage is that Roth IRA contributions are not tax-deductible. However, the investment earnings within it accumulate on tax-deferred basis. And since you did not get a tax deduction on the contributions, if you make withdrawals after turning 59 1/2, and you’ve been in the plan for at least five years, you can withdraw both your contributions and the investment earnings on them, on a tax-free basis.
A Roth IRA will also provide you with a form of tax diversification in retirement. It means that at least some of the income that you take in retirement will not be subject to income tax.
3. Save Money in Non-retirement Investment Vehicles
Though it’s always better to have either a tax deferral or a tax-free angle to your retirement savings, there’s nothing in holy writ that says that you can’t save money for retirement in non-tax-sheltered investment vehicles.
That includes investing your money in stocks, mutual funds, exchange traded funds, real estate investment trusts (REITs), or investment brokerage accounts that hold some or all of these investments.
True, there’s no tax-advantage to saving money in this way, but it is a form of asset accumulation, and that will help when you retire.
But there’s another side of this that will provide an unexpected benefit. Since non-tax-sheltered investments get no tax benefit during the accumulation phase, there is no tax liability when you withdraw money. Similar to a Roth IRA, that will mean that you will have an income source that is not also create a tax liability.
4. Own Your Home – And Pay Off the Mortgage!
This isn’t the best strategy for every single person, but it’s a great move for some. For one, houses tend to appreciate in value over time. And of course there are a number of tax benefits that come with owning a home, mainly tax-deductibility of mortgage interest and real estate taxes.
But you should never take the prospect of rising property values for granted. The financial meltdown of 2007-2009 depressed property values in most of the country, and quite deeply in certain markets. For this reason, you should make it a point to pay off your mortgage as soon as possible.
That will accomplish three things:
- The elimination of the monthly house payment will make more money available for investing
- Owning a mortgage-free home will lower your basic cost of living in retirement
- A 100% equity position in your home will give you plenty of options to downsize – that is, to sell your house and move to a less expensive living arrangement
All three benefits will be especially important if you are preparing for retirement late in the game and won’t have a large amount of retirement savings.
5. Get Out of Debt
This strategy is similar to paying off your mortgage, but you apply it to your entire debt situation. By getting out of debt, you reduce the amount of income that you will need in retirement.
Lowering your basic cost of living is one of the very best strategies for preparing for retirement when you are late in the game. In addition to the fact that you will need less money to live on, you also gain a greater sense of control over your finances and your life.
Those are just five ways to prepare for retirement late in the game. We haven’t even gone into retirement income strategies, but I have covered those in the past and will continue with more in the future.
Are you one of the many millions of Americans who are preparing for retirement late in the game? If so, what are you doing to prepare for your retirement years?