In the 1985 movie “Lost in America,” a gambler depletes her life savings after a frenzied night in a Las Vegas casino. It’s meant to be funny, but it also serves as a cautionary tale.
The best retirement plans require smart preparation along with a disciplined saving and spending plan. Making sound decisions every step of the way increases your odds of long-term financial success.
The greater your ability to delay gratification, the more cash you’ll accumulate for your retirement savings. Excessive spending early in your working life reduces your margin for error in later years.
“We see kids get out of college and start spending on an expensive car, a nice apartment,” said Barry Bigelow, an advisor in Duluth, Minn. “They use up their whole paycheck on a lifestyle.”
Intellectually, young people might know they need to start socking away money sooner rather than later. But if they fear investing in a volatile stock market — or they simply prefer to indulge — they may rationalize their decision to spend freely.
Investing on a regular schedule, especially through automatic withdrawals into a tax-deferred retirement account such as a 401(k), can create an effective and effortless strategy to build up retirement savings. Dollar-cost averaging enables individuals to buy more shares when prices sag and less shares when they’re soaring.
“It’s important to stay the course and keep contributing,” said Jessica O’Donnell, a certified financial planner in Malden, Mass. “And with the power of compound interest, I’ll show clients how many years it will take to double their money” based on interest rate assumptions.
Best Retirement Plans: Mindset Is Important
Your attitude about your nest egg can play a huge role in determining whether your money lasts as long as you do. If you’re prudent about expenditures — and you’re a disciplined saver — you’re more apt to stick with your long-term plan.
But irrational thoughts can interfere. O’Donnell finds that those who inherit wealth may want to preserve it for future generations. As a result, they deny themselves access to their savings.
“They may think of themselves as stewards of family money, so they don’t spend it,” she said. “They think their situation is worse than it is.”
By contrast, some midcareer professionals lapse into complacency. They may procrastinate rather than adopt a plan to put aside enough money to retire comfortably.
Many advisors encourage clients in their 30s and 40s to direct at least 15% of their take-home pay into retirement accounts. The strategies vary based on a host of variables.
Can You Have More Than One Retirement Plan?
Rob Jones, a certified financial planner in Overland Park, Kan., suggests that clients follow a three-step process to construct their nest egg. First, they should take full advantage of their employer’s match of their 401(k) contribution. From there, he proposes they set up a low-cost Roth IRA. Finally, he urges them to deposit the maximum allowable annual amount into their 401(k), even if their employer does not match these additional funds.
“Many 401(k)s have limited investment options,” Jones said. “But with a Roth IRA, you’ve got an entire universe of options so you want to take advantage of that.”
Retirement Savings As You Near Retirement
By the time you reach your 50s, your nest egg takes center stage. You’ll need to assess where you stand, what funds await you in retirement (from pensions to Social Security) and what holes to fill before then.
Ideally, your accumulated savings will cover your projected liabilities for decades to come. But in many cases, you must race to save more and spend less.
After age 50, catch-up contributions enable savers to add $6,000 a year to their 401(k). And at age 55, you can start contributing an extra $1,000 a year to a health savings account (HSA) that grows tax-free until you spend the money on qualified medical expenses.
Another factor in calibrating the size of your nest egg involves Social Security. Deciding when to start receiving these payments poses a challenge.
“It’s one of the largest financial decisions most Americans make in their lifetime,” said Bill Meyer, founder of Social Security Solutions in Leawood, Kan. “Cumulatively, it can be a $1 million decision or more.”
Because there’s no one-size-fits-all strategy, Meyer recommends that individuals in their late 50s begin to examine their options. They should project their longevity (based on their family history, health status, etc.), study the rules that govern benefits and coordinate the anticipated drawdown of their nest egg with expected Social Security funds.
How Do You Calculate Social Security Benefits?
The U.S. Social Security Administration mails an annual statement to most American workers age 60 and above. Review it to confirm you have 35 years of earnings history, which helps determine the amount you can expect to receive.
“To increase your payout, consider working one or two more years at higher pay so that you replace one or two of your lowest-earning years,” said Meyer, co-author of “Social Security Strategies.”
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