With the stock market hitting record highs and the economy continuing to gain strength, boomers can look to 2014 with hope and determination to improve our financial situation and to keep us on the path to a successful retirement.
A survey by Fidelity Investments shows that 54 percent of Americans have pledged to reform their financial lives in 2014, up from 35 percent in 2009. We all make pledges at the start of the year to better ourselves, but sometimes life gets in the way. Katie Libbe, vice president of consumer insights for Allianz Life Insurance Co., offered these tips for boomers on how to launch (and keep) a successful financial plan in 2014:
Establish better habits into real financial planning. Although the last major financial crisis was only five years ago, many Americans have already forgotten the trauma it caused their portfolios. In fact, a recent survey from Allianz Life Insurance Company of North America found that only 16 percent of respondents said they would include financial planning in their 2014 resolutions, less than half of the 33 percent who said they would make financial planning a priority when making resolutions in 2009.
One reason people feel more financially stable heading into this year is because some are adopting better financial habits. Fewer of the Americans surveyed this year admit they are doing things like spending too much money on things not needed and spending more than they make. %VIRTUAL-article-sponsoredlinks%While financial habits are clearly improving, being a little smarter with money is not the same as true financial planning. People need to take the next step and turn better habits into longer term-planning.
Align short-term goals with a long-term plan. A major financial-planning mistake many people make is not having true alignment with their short-term goals, such as improving bad habits, and their ultimate financial goal: retirement. For example, saving money every month by cutting out an unnecessary expense can definitely have a positive effect on financial stability, but it should also be tied to a larger savings goal (like increasing their 401(k) contributions). This is especially true for boomers who have to ensure they have enough assets for a retirement period that could last 25-30 years or longer. With longer life expectancies than ever before, boomers need to make sure their money lasts as long as they do.
Embrace the Transition Period. For boomers who are five to 10 years away from the start of retirement, their priorities need to start shifting from asset accumulation, which involves building their nest egg, to retirement income, which includes determining how they will access their savings once retirement starts. This is called the "Transition Period" and it's a stage in the financial planning conversation that doesn't get nearly enough attention.
Unfortunately, the income part of retirement is not as simple as turning on a switch. A wise plan of action is to meet with a financial professional during this time and discuss any changes and/or late-stage opportunities. This includes actions like making "catch-up contributions" to HSAs and 401(k)s. This is also an ideal time to examine the available options for drawing retirement income -- including products that can provide guaranteed income.
Understand Social Security and tax efficiency. The role of Social Security benefits in retirement will be different for every person and everyone needs a customized strategy that takes into account their financial situation, longevity and existing retirement assets among other things,
When determining a withdrawal strategy of retirement accounts, it's best to consult with a financial professional that understands the tax implications and what should be done first.
Get engaged in your finances. To have real confidence about your finances this year, it's crucial to truly get engaged with financial planning. This means more than simply watching your spending and sticking to a budget, it involves a regular review of accounts (at least quarterly), scheduled conversations with financial professionals (financial adviser, insurance agent, lawyer, tax professional, etc.), and a financial plan that addresses how boomers will pay for both their "needs" in retirement, and also the "wants" and "wishes" that make retirement something to look forward to.
6 Costly Retirement-Saving Setbacks
New Year's Resolutions Baby Boomers Should Make
For the best chance of maintaining your lifestyle in retirement, aim to contribute 15% of your salary, including any employer match, to your 401(k) or other savings account throughout your career (see What's Your Retirement Number?). Most people fall short of that benchmark. The average employee contribution to a 401(k) is 6% to 8%.
Saving 15% may seem like lifting weights at the gym for several hours. Try it anyway, says Stuart Ritter, a financial planner and vice-president of T. Rowe Price Investment Services. "Kick your contribution level up to 15% for three months. At the end of the three months, you can lower it, if necessary." But rather than dipping back to single digits, go with 10% or 12%, he says. "People find they can settle on a much higher amount than they were contributing before."
Procrastination is another risk: With each year you neglect to save, you lose an opportunity to fuel your accounts and to let compounding keep the momentum going.
So powerful is the effect of saving early that you could have less trouble catching up if you take a several-year break-say, to pay for college-than if you wait until midlife to start. At that point, says George Middleton, a financial adviser in Vancouver, Wash., "the amount of money you have to put away can be ungodly."
Still, you can make headway, especially if your kids are grown and you have fewer expenses. Say you're 55, earn $80,000 a year and have nothing saved for retirement. You put the pedal to the metal by setting aside $23,000 in your 401(k) each year for the next ten years. That $23,000 combines the annual maximum for people younger than 50 ($17,500 in 2013) plus the annual catch-up amount for people 50 and older ($5,500). If your employer matches 3% on the first 6% of pay and your investments earn an annualized 7%, you'd amass $434,700 by the time you reached 65.
For some investors, a bad case of the jitters became a bigger derailer than the recession itself (see How to Learn to Love [Stocks] Again). "People got very nervous and became more conservative, so when the market came back up, they had less of their portfolio participating in the rally," says Suzanna de Baca, vice-president of wealth strategies at Ameriprise Financial.
You can get back in (and stay in) by investing in stocks or stock mutual funds in set amounts on a regular basis. Using this strategy, known as dollar-cost averaging, you automatically buy more shares at lower prices and fewer shares at higher prices-an antidote to market-driven decisions. Once you decide on your mix of investments, use automatic rebalancing to keep it that way, advises Debbie Grose, of Lighthouse Financial Planning, in Folsom, Cal.
Most financial planners recommend that your portfolio be at least 80% in stocks in your twenties, gradually shifting to, say, 50% stocks and 50% fixed-income investments as you approach retirement. But formulas don't cure panic attacks. "Set your risk at the level you're willing to withstand in a downturn," says Middleton.
Amassing hundreds of thousands of dollars for retirement is challenge enough, but parents are also expected to save $80,000 to $100,000 per kid to cover the college bills. In fact, half of parents don't save for college at all, and the average savings among those who do runs about $12,000, according to a 2013 report by Sallie Mae, the financial services institution. Faced with a shortfall, two-thirds of families say they would use their retirement savings to pay for their children's college education, if necessary.
Don't wait until your kid is 17 to discuss how much you'll contribute. Have a conversation early about how much you can afford to give, says Fred Amrein, a registered financial adviser in Wynnewood, Pa.
A Roth IRA can be one way to save for both college and retirement, although it won't get you all the way to either goal. You can contribute up to $5,500 a year ($6,500 if you're 50 or older) in after-tax dollars, and the money grows tax-free. You can withdraw your contributions for any reason, including college, without owing tax on the distribution. You will pay taxes on the earnings (unless you're 59 1/2 or older and have had the account for at least five calendar years), but you won't have to pay a 10% early-withdrawal penalty if you use the money for qualified higher-education expenses.
Leaving the workforce, even temporarily, deprives you of current income and makes it tougher than ever to save for retirement. You might even find yourself tapping your retirement accounts to cover day-to-day expenses. You'll owe taxes on distributions from a traditional IRA plus a 10% penalty if you're younger than 59 1/2.
The best way to avoid that dismal situation is to have an emergency reserve that covers at least six months or even a year of living expenses, says Jim Holtzman, a certified financial planner in Pittsburgh. He acknowledges, however, that "that's easy to recommend and hard to implement." Avoid further disaster by hanging on to health insurance: If you can't get coverage through your spouse, look into keeping your employer-based coverage through COBRA. You can extend that coverage for up to 18 months, although you'll pay the full premium plus a small administrative fee. As of January 2014, you'll also have access to coverage through state health exchanges.
Married couples who depend on each other's earning power need life insurance to cover the gaps when one spouse dies. You can get a rough idea of how much coverage you'll need on each life by calculating what you each contribute to annual living expenses and multiplying that amount by the number of years you expect to need it, says Steve Vernon, of Rest-of-Life Communications, a retirement consulting firm. (For advice on how to do a more precise calculation, see How Much Life Insurance Do You Need?)
If you have a pension, you'll have the option of choosing a single-life benefit, which ends at your death, or the standard joint and survivor's benefit, which pays less while you're alive but keeps paying (typically at 50% to 75% of the benefit) for the rest of your spouse's life. Your spouse is legally entitled to the survivor's benefit and must sign a waiver to forgo it. Don't be tempted by the higher-paying single-life option if your spouse will need the survivor's benefit later.
Decisions you make in claiming Social Security are similarly key. If you're the higher earner (typically, the man), "you will really help your spouse by delaying Social Security as long as possible," says Vernon. The benefit grows by about 6.5% to 8% a year for each year you delay after age 62, when you first qualify, until you reach age 70. If you die first, your spouse can qualify for a survivor's benefit up to the full amount you were entitled to, depending on the age at which she files.