Disappearing pensions, continued corporate downsizing, and stubborn unemployment combine to ignite great concern that many folks still don’t save enough for retirement. Maybe you’ve given up trying to realistically assess your future costs, or you simply still spend too much without saving. Whatever the reason, here’s how to get your finances together while you still have time.
Granted, you probably endure plenty of good reasons for spending a lot; health care costs increase all the time, for example. American consumer debt recently jumped the most in more than six years, according to a report from the Federal Reserve Bank of New York. Our collective outstanding consumer debt hit $3.24 trillion last summer. And our total credit card balances: most of $880.5 billion as of last July.
I suspect, though, that much more to blame for our paltry nest eggs is poor savings habits in the first place. These widespread bad habits are actually a crisis, although many folks don’t wake up to any shortage of retirement money unless an age-related or medical condition sends the family into a financial tailspin. Many folks in retirement can spend more annually on prescriptions and basic housing than they earn from pensions, Social Security, and retirement-plan investments.
A GOBankingRates survey found that more than 37% of Americans’ biggest financial resolution for 2015 is saving money – and nearly a quarter are nowhere near confident about hitting that goal. Overall, building an emergency fund was first among short-term savings goals; saving for retirement topped the popular long-term goals. Too bad that insufficient income was the top response for the biggest obstacle facing savers in 2015, followed by unemployment.
Unsurprisingly, baby boomers, born between 1946 and 1964, were most likely to be saving for retirement, according to the survey. Trouble is, unemployment is the biggest roadblock to their doing so.
Sound familiar? To address these shortcomings, you must get a handle on all your potential areas for funding a long-term savings plan – including employer plans, individual retirement accounts, Social Security, long-term care and disability insurance, and even annuities.
Reviewing all of these avenues makes it apparent that the vehicles are available. The question becomes how to fund the savings plan.
Welcome to Parkinson’s Laws, specifically the third one that states that expenses always rise to meet available income, and then some. As the law says, “It’s always possible to live outside your means.”
The good news: This works in reverse as well. Voluntarily diverting your available resources, or expendable income, into savings may be a little awkward and painful at first. But you quickly figure out how to bring your day-to-day expenses into equilibrium. As you accomplish this, you can gradually build what you divert to savings and accelerate growth of those accounts.
Your next question: Where to put your savings? The following order makes sense for most folks:
- Workplace 401(k), 403(b) or 457(b) up to your employer’s match; many employers match around 5% of an employee’s pay.
- Roth IRA, where you can contribute up to $5,500 a year ($6,500 for folks over 50); you can open an account with a discount brokerage, a mutual fund company, an insurance company or your local bank.
- Maxing out your 401(k) or other tax-deferred plan.
- Your choice of low-cost investments: no-load annuities, funds of high-growth stock or various forms of life insurance.
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Written by Jim Blankenship, CFP, EA. Jim Blankenship is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is the author of An IRA Owner’s Manual and A Social Security Owner’s Manual. His blog is Getting Your Financial Ducks In A Row, where he writes regularly about taxes, retirement savings, and Social Security.
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