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“You can be young without money, but you can’t be old without it.” So said Tennessee Williams, one of America’s notable playwrights. Yet nearly half of families with adults between the ages of 32 and 61 in the United States have no retirement savings at all. The median retirement savings for families in America who have savings, is just $60,000.
Based on this data, it’s not surprising that 52 percent of Americans are at risk of not having enough to maintain their current living standards in retirement.
This means that even people who have been saving consistently for retirement may need to put away even more in order to maintain their existing lifestyles. The good news is that no matter where you are on the continuum, it’s not too late to build retirement savings. A good review of your personal finances may reveal you can accumulate more than you think.
A rough rule of thumb is you should contribute 15 percent of your gross household income into your retirement plan to maintain your current lifestyle in retirement. This figure assumes you will have additional sources of income, such as Social Security. Table 1 provides some benchmarks to help you know if your strategy may be on the right track.
Regardless of where you stand now, there are steps you can take to help put yourself on track. You will need to consider many factors when planning how much to contribute from this point forward. They include:
Table 2 provides guidance on what your contribution rate should be based on your current retirement balance. For example, if you are 40 years old and your current retirement account balance is equal to your current salary (1x salary contributed), then you should aim to contribute 24 percent of your salary going forward to help put yourself back on track for retirement.
Knowing what to contribute is the first step. Coming up with enough money to contribute the required amount, however, may be a tougher hurdle to clear.
“Simply telling someone to spend less or work longer isn’t very helpful. But reviewing spending in detail and discussing priorities and strategies could uncover some opportunities and surprises,” says Kathy Kraeblen, senior wealth strategist at PNC Wealth Management.
“Even people who feel they are well prepared for retirement can be pleasantly surprised by the opportunities we can identify together. We believe everyone can benefit from a thoughtful review of their finances, followed by an open discussion of goals and concerns,” she adds.
Having the appropriate asset allocation for your goals and personal situation can help make reaching your retirement goals more realistic.
Asset allocation – your mix of stocks, bonds, cash and any other assets – is one key point to review.
When choosing how and where to invest, it’s important to balance short-term and longer-term needs. “I don’t really think about asset allocation based on age. I think of it more based on your goals for the money. And if you need to make that money work harder, a more aggressive allocation can make sense,” says Kraeblen.
In general, any money you might need to access quickly should be in safer investments, according to Kraeblen. Safer investments include cash or certain types of bonds. However, with the low interest rates we are experiencing now, these options will not provide the level of returns you likely will need for a comfortable retirement.
Those who need their money to work harder often use mutual funds, exchange-traded funds and other investments that bundle a whole group of stocks or bonds together. Riskier assets, like stocks, have the potential for higher returns, but also higher potential for losses. In addition, they’re more volatile over the short term, meaning their prices can fluctuate greatly.
Many people are too conservative due to misguided thinking about risk. Some people think only about the risk of a market downturn and, due to that fear, invest too conservatively. Meeting with a financial planner and an investment advisor can help you understand the different types of risk.
What is safe for one person may not be safe for another. And one person’s idea of safety through a conservative asset allocation is not necessarily safe when you consider all forms of risk. An investment advisor and financial planner can help you customize your asset allocation based on your financial situation and emotional relationship with money, she adds.
For example, an older person can have a large allocation to equities if they have sufficient cash or other guaranteed sources of income to get them through market downturns. Markets historically have come back. It’s easier to get comfortable with bear markets if you have a clear plan to fund living expenses and know how much cash you need as a cushion.
“If we’re working with someone whose retirement assets aren’t quite where they need to be, pushing that asset allocation to be more aggressive is appropriate,” Kraeblen says, adding, “Not pulling from the investment account gives it time to accumulate. And then we can change the asset allocation in the future to be less aggressive.”
In cases where it is not feasible to accumulate all the funds you will need, you may choose to work longer if that is an option. Working even a few years beyond age 65 has multiple benefits, including:
Are You on Track?
A rough rule of thumb is you should contribute 15 percent3 of your gross household income into your retirement plan to maintain your current lifestyle in retirement. This figure assumes you will have additional sources of income, such as Social Security. Table 1 provides some benchmarks to help you know if your strategy may be on the right track.
Uncovering Additional Money
Reviewing your finances may uncover some ways to cut expenses and make more contributions to retirement plans. Below are some examples:
Credit card debt: Paying credit card interest is the equivalent of throwing away money. Reducing credit card debt can unleash additional funds that you can put toward retirement.
Paying for your children’s education: Assisting your children is a great joy of parenthood. But if it’s at the expense of your financial security in retirement, you may not be helping your children as much as you think. Being financially independent later in your life may end up being a greater gift to them.
Employer matches on 401(k) contributions: Many plans offer matches on contributions up to a set percentage. This is essentially free money. At a minimum, you should contribute enough to maximize the employer match.
Pay yourself first: Use automatic transfers to make contributing easier. If the money does not pass through your hands in the first place, you will be less likely to miss it.
The power of compound interest: The investment magic of earning interest on interest is a key strategy for accumulating wealth painlessly. Resist the temptation to withdraw earnings on funds.
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1. "The State of American Retirement", Economic Policy Institute, March 2016
2. "National Retirement Risk Index", Center for Retirement Research at Boston College
3. “How Much Should People Save?”, Center for Retirement Research at Boston College, July 2014
4. Assumes a 4% real rate of return and an initial withdrawal amount of 4% of the age 65 balance replacing 50% of the age 65 salary.
These articles are for general information purposes only and are not intended to provide legal, tax, accounting or financial advice. PNC urges its customers to do independent research and to consult with financial and legal professionals before making any financial decisions.
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