Money Matters – Do’s and don’ts for late-start retirement savers Part one of two

by | Feb 1, 2016 | Business News

Despite the helping hand of a fairly strong market for last five-plus years, plenty of workers are playing catch-up when it comes to their retirement savings.
According to data obtained from a recent survey households age 55 to 64 with at least one earner have retirement savings that are less than one times their annual income. Given the shrinking share of households covered by pensions, it’s no wonder that 72 percent of people age 50 to 64 believe they will have to delay retirement, according to a recent AARP poll, and half don’t think they will ever be able to retire.
Working longer is a win-win-win from a financial standpoint, but it may not be an option for some older workers. Rather, a combination of tactics–working longer (if you can), deferring Social Security (if you can, though I don’t necessarily agree with this recommendation), and continuing to save (again, if you can) – will give you the best shot at making retirement work if you’re getting a late start on the savings component.
If you count yourself among the late bloomers who are saving and investing for retirement, here are some tactics to consider, as well as some pitfalls to avoid.
Do – Be prepared to take some risk.
The key attraction of cash and high-quality bonds is that they’re less volatile than stocks. Whereas stocks lost more than a third of their value during the financial crisis, for example, such losses are unthinkable for bond investors. Meanwhile, investors in true cash instruments guarantee principal stability.
But that peace of mind comes at the cost of lower returns: Bond yields have historically been a good predictor of the asset class’ return over the subsequent decade, and they’re right around two percent right now. Cash returns are even lower, making them a guaranteed loser when you factor in inflation. Thus, accumulators who need their retirement assets to grow have no choice but to steer a healthy share of their portfolios toward stocks, letting their time horizons determine how aggressive they go. For example, the Moderate version of Morningstar’s Lifetime Allocation Indexes, for someone aiming to retire in 2025, features a hefty 60 percent stock weighting. Investors who are nervous about the volatility that such a large portion of stocks entails might consider buying an all-in-one fund, such as a target-date vehicle. By mixing both stocks and bonds and reporting their combined performance, such funds help camouflage the visible performance bumps that inevitably accompany a stock investment.
Do: Take advantage of catch-up contributions.
Workers over 50 have the opportunity to give their retirement plans an extra shot in the arm by making so-called catch-up contributions: an additional $1,000 annually to their IRAs and an additional $6,000 for 401(k)s, 403(b)s, and 457 plans. Thus, savers over 50 can contribute $6,500 to their IRAs for the 2015 tax year and a full $24,000 to their company retirement plans. It’s also important to note that retirement savers are eligible for those catch-up contributions on Jan. 1 of the year in which they turn 50; Vanguard research indicates that many savers miss out on catch-up contributions when they initially become available.
Do: Count on your own contributions, rather than market returns, to do the heavy lifting.
Stocks have returned seven percent on an annualized basis in the past decade, and twice that much during the past five years. But those sorts of returns are far from guaranteed. Heightening contributions can help offset the risk that market performance is lackluster in the years leading up to retirement. For example, say you were adding $15,000 a year to your $100,000 portfolio for 15 years and you earned a reasonable five percent rate of return. You’d have $531,000 at the end of the period, more than if you had saved $10,000 for 15 years and earned a robust (but arguably less realistic) seven percent return on your money.
Do: Factor in taxes when determining portfolio sufficiency.
After a six-year bull market, retirement-account balances are, in many cases, looking comfortingly plump. But it’s important to take any taxes into account when determining the sufficiency of your nest egg. If most of your assets are in tax-deferred accounts like traditional 401(k)s and IRAs, you’ll pay ordinary income taxes on those balances, provided you haven’t put in any after-tax money. Someone in the 15 percent tax bracket would see her $300,000 401(k) portfolio balance shrivel to $255,000 once taxes are factored in, for example. The best retirement calculators, such as the T. Rowe Price Retirement Income Calculator, factor in the role of taxes for you. But if you’re calculating your retirement readiness on your own, be sure to give your portfolio a tax haircut.
Do: Consider working longer as part of your retirement plan.
Working longer is one of the most powerful things you can do to help make a save if you’re hurtling toward retirement but haven’t yet amassed much in assets. While many individuals may not relish working past the usual 65, delaying retirement offers a valuable financial three-fer: continued investment contributions, delayed portfolio withdrawals (which can greatly improve a portfolio’s longevity), and the potential to claim Social Security later, thereby enlarging the benefit. Putting in even a few extra years, combined with some of the measures outlined above, can tip the scales of success in your favor. This article does a deeper dive into the financial benefits of working longer. Yet, working longer isn’t always viable for a host of reasons, so this strategy is best used in conjunction with–rather than instead of–some of the saving and investing strategies discussed above.
The “Don’ts” for Late-Start Retirements Savers will be discussed in the March issue of The Magazine of Santa Clarita.
For more information, please call Douglas J. Sedam at 1-866-549-3900, 661-295-2400 #1 or email: Doug.Sedam@ThePaseoGroup.com.  You may also learn more at www.ThePaseoGroup.com.
Securities and Investment Advisory Services offered through Financial West Group which is a member FINRA/SIPC. OSJ Office: 4510 E. Thousand Oaks Boulevard, Westlake Village, CA 91362, Phone: 1-866-502-8929 The Paseo Financial Group, Inc. and Financial West Group are unaffiliated companies. The Paseo Financial Group, Inc. encompasses the following companies: The Home Loan Pros – Residential, Investment, & Commercial Real Estate Mortgages; Oak Tree Realty – Residential, Investment, & Commercial Real Estate Sales; and The Financial Services Pros – Investments, Insurance, & Retirement Planning. 

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