Just about nobody is where they want to be in saving for retirement. The competition for dollars is fierce, with many struggling just to pay monthly bills, children’s college education, or any number of priorities. The stock market has been done too cooperative either, with its wild gyrations, and not just this year. Some financial gurus even debate whether the 2000s were a lost decade, as overall, returns have mostly disappointed. Many people look at their 401k statements and wonder just how golden the golden years will be? It’s a question keeping many up at night, deciding to delay retirement, or to modify “retirement” to include working, hopefully in a less stressful job that they like.
The pressure is on to play catch up. There’s a right way to do it and a way to make matters worse. Here’s what you need to know to get on the path to reclaiming your retirement dream.
Create a detailed catch-up plan.
Identify where you are financially now. What is your net worth, income, expenses and current savings? Next, determine the amount you need to save to live comfortably in retirement. Conventional wisdom says about 80% of what you do now, and depends on the number of years you have left before your retire, points out Derrick Kinney, a financial planner with Derrick Kinney & Associates. But that’s not necessarily true – it’s also about your circumstances and your priorities.
Get a handle on your budget.
Quit guessing. There are any number of online tools like say, Mint.com, that leave no excuses for not knowing how much money is coming in, going out, and where. See where you can make cuts so you’ll have more money to sock away. Set up automatic deposits to your savings account. Also increase your 401k and Roth contributions.
Deal with debt.
Eliminate as much debt as possible and lock in long-term debt at a low interest rate. Bill Martin, a certified financial planner with MassMutual even goes so far as to say to not borrow money. Drastic times call for drastic measures. Think twice about large purchases without first understanding the impact on your retirement plan. Do you really want to splurge on a vacation home, an expensive second car?
Avoid costly mistakes.
Sure, you’re trying to make up for dreams deferred, but don’t bet the farm on one hot investment like gold, or commodities. Following what has been hot is a fool’s game, warns Ben Gurwitz, a certified financial planner with Financial Life Advisors. Stick to a long-term plan when investing. Keep your cool. Do not change your risk tolerance in an effort to catch up.
While you don’t want to obsess about your portfolio, monitor it periodically, and rebalance when needed, perhaps once or twice a year. Do double check fees and commissions. Many people are paying 2% or more in total fees on investments. The easiest way to have more money is not to spend it. Make sure you are getting value for what you are paying.
Don’t be rash and go all cash. Cash is earning less than 1% and inflation is higher than that. The sidelines may seem like a good idea, but think again. You need to take some risk. Not investing some of your portfolio in growth investments can be a big mistake. The stock market can give you a stomach ache, but mostly it still is the champ when it comes to fighting inflation. Remember, if you retire at 65, you could easily have a good 20 years or more in retirement. You don’t want to outlive your money.
It’s bad enough to make critical mistakes when you’re behind in your savings goal and retirement is a decade or less away, but just as bad is the 20 and 30-somethings who are running scared from the stock market. The earlier you become disciplined about investing, meaning you can’t give in to every impulse, be it fear, or greed, the better off you will be. Your money has a longer time to compound and it can ride out the market’s ups and downs. Overall, you’ll likely be just fine, thank you very much. It’s easier to save 5% your entire life than 30% or more when you turn 50. The younger person who always saved 5% will have more money than the late saver.
You may feel behind, but like with the tortoise and the hare, slow and steady also wins the retirement race.