JAN/FEB 2014
It Isn’t Too
Late to Save
for Retirement
If you’re 40 or 50
and haven’t begun,
you must make the
effort.
by Chrysantha
Clark, CFP®
Some people start
saving for retirement
at 20, 25, or 30. Others start later, and while their accumulated assets will have fewer years
of compounding to benefit from,
that shouldn’t discourage them to
the point of doing nothing.
If you need to play catch-up,
here are some retirement savings
principles to keep in mind. First of
all, keep a positive outlook. Believe
in the validity of your effort. Know
that you are doing something good
for yourself and your future, and
keep at it.
Starting later means saving more
– much more. That’s reality; that’s
math. When you have 15 or 20
years until your envisioned retirement instead of 30 or 40, you’ve got
to sock away money for retirement
in comparatively greater proportions. The good news is that you
won’t be retiring strictly on those
contributions; in large part, you will
be retiring on the potential earnings
generated by that pool of invested
assets.
How much more do you need to
save? A ballpark example: Marisa, a
pre-retiree, has zero retirement savings at age 45 and dedicates herself
to doing something about it. She
decides to save $500 each month
for retirement. After 20 years of
doing that month after month, and
with her retirement account yielding 6% a year, Marisa winds up with
about $225,000 at age 65.1
After 65, Marisa would probably realize about $10,000 a year
in inflation-adjusted retirement
income from that $225,000 in
invested retirement savings. Would
that and Social Security be enough?
Probably not. Admittedly, this is
better than nothing. Moreover, her
retirement account(s) might average better than a 6% return across
20 years.1,*
The math doesn’t lie, and the
message is clear: Marisa needs to
save more than $6,000 a year for
retirement. Practically speaking,
that means she should also exploit
vehicles which allow her to do that.
In 2014, you can put up to $5,500
in an IRA, $6,500 if you are 50 or
older – but you can sock away up
to $17,500 next year in a 401(k),
403(b), Thrift Savings Plan and
most 457 plans, which all have a
maximum contribution limit of
$23,000 for those 50 and older.2
If Marisa is self-employed (and
a sole proprietor), she can establish a solo 401(k) or a SEP-IRA.
The yearly contribution limits are
much higher for these plans. If
Marisa’s 2013 net earnings from
self-employment (after earnings
are reduced by one-half of self-employment tax) work out to $50,000,
she can put an employer contribution of up to $10,000 in a SEPIRA. (She must also make similar
percentage contributions for all
“covered” employees, excepting her
spouse, under the SEP IRA plan.)
As a sole proprietor, Marisa may
also make a combined employeremployee contribution of up to
$33,000 to a solo 401(k) this year,
and if she combines a defined
benefit plan with a solo 401(k), the
limit rises to $47,400. If her 2013
net earnings from self-employment
come out to $150,000, she can
make an employer contribution
of as much as $30,000 to a SEPIRA, a combined employee salary
deferral contribution and employer
profit sharing contribution of up
to $53,000 to a solo 401(k), and
contribute up to $96,300 toward
her retirement through via the
combination of the solo 401(k)
and defined benefit plan.3
How do you save more? As you are
likely nearing your peak earnings
15
years, it may be easier than you
initially assume. One helpful step
is to reduce some of the lifestyle
costs you incur: cable TV, lease
payments, and so forth. Reducing
debt helps: every reduced credit
card balance or paid-off loan frees
up more cash. Selling things helps
– a car, a boat, a house, collectibles.
Whatever money they generate for
you can be assigned to your retirement savings effort.
Consistency is more important
than yield. When you get a late
start on retirement saving, you
naturally want solid returns on your
investments every year – yet you
shouldn’t become fixated on the
return alone. A dogged pursuit of
double-digit returns may expose
you to considerable market risk
(and the potential for b