Well over half of Americans now in their 40s are at risk of experiencing a decline in their standard of living after they retire, according to the Center for Retirement Research at Boston College. But adopting the right retirement planning strategies at this phase of your life will help you avoid financial disaster in your golden years.
It may sound obvious, but you have to start by figuring out how much it'll cost you to live in retirement. And to do that, you'll first need to define what you want your retirement to look like. Does your definition of happiness involve spending a large amount of time reading books on your porch? Traveling extensively? Volunteering? Or working part-time?
Then there are the more mundane financial items to consider. For example, will you have your mortgage paid off? How much will you require for living expenses and utilities? How much will you budget for health care costs and leisure?
How you answer these questions will define what income needs you'll have in retirement. But don't feel overwhelmed.
To know if you'll have a shot at being able to cover your retirement expenses, you need to calculate your retirement income. How much money will you receive from Social Security, pensions, and other sources of income? Do you intend to work part-time? How much income can you expect to receive from your 401(k)s and IRAs? Total up your anticipated income. Naturally, there are levels of uncertainty involved in any calculation made decades in advance, but it is possible to get a reasonably good idea of where you stand.
Next, the moment of truth -- it's time to see how close you are to your dream retirement with your current savings plan.
Check out Fidelity's Retirement Quick Check tool, which can project how much money you'll need, compare it to what you're on track to have, and identify changes you can make to address any shortfall. The tool also factors in inflation assumptions, so that you don't have that figure that out.
3. If you're coming up short, strategically redirect your dollars
If the gap between your expected sources of income and your future needs is sizable, the first thing you need to do is reassess your current spending, find places to cut, and redirect every dollar you can into your retirement accounts.
To help further close the gap, you have options. You can work longer and delay retirement by a few years. Consider downsizing your future plans -- for example, you can decide you'll do less travelin in retirement. If you're looking for ways to significantly decrease your pre-retirement expenses, you could sell your existing house and move into something smaller, especially if you become an empty nester.
In your 50s, you've got to make saving for retirement your No. 1 priority by putting your needs ahead of others'. It's a hard truth to face, but remember that there are alternatives for your dependents (e.g., loans for funding a child's college expenses). Retirement savings is all on you.
If you haven't already done so, consider seeking guidance from a financial planner who can provide you with recommendations that are more customized to your particular situation.
Don't wait another day
Retirement is getting closer each day. So make the most of the years you have left to save. By estimating your retirement expenses, identifying your shortfalls, and taking steps to redirect your dollars toward retirement savings, you'll reap the glorious reward of a truly golden retirement.
Motley Fool contributor Nicole Seghetti writes about personal finance, retirement, and investing. Follow her on Twitter @NicoleSeghetti.
6 Costly Retirement-Saving Setbacks
3 Retirement Planning Tactics to Adopt Before You Hit 50
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.