According to a T. Rowe Price study, there is a $4 trillion difference between what workers will need and what they have actually accumulated for retirement. Many people know they should be saving more, but life is expensive. This is especially true today when inflation has just risen faster than it has in forty years. Many planners suggest a saving rate of between 12-15% of gross oncome to meet future retirement needs.
Saving more often starts with an analysis of your spending habits. Determine if what you are considering buying is a want or a need. I recently had one client tell me that a family member talked them into buying a new car when their previous one was still in good condition and working fine. This new auto cost over $300 per month for the next six years!
How much do we spend on cell phones and cable television every month? Ads for cell phones seem to talk more about movie quality cameras than communication devices. Sports shoes today cost much more than the Red Ball Jets; we wore in our younger lives.
Another thing you can do is invest in an IRA. This gives you tax deferred growth. If it is a 401k, you may get a company match up to some level. Free money is hard to beat. Don’t make the mistake that many people do and end up with all of your savings only in pre-tax or qualified money. It is much better to have savings in all three types of taxable accounts.
The other two types are tax preferred such as a Roth and a non-qualified or after-tax savings. This type of account only makes you pay taxes on the earnings. Another mistake many people make is having too much money in banks or money markets. While your emergency money should be readily accessible in a no risk account, having too money there may get lower interest rates. Bank CD rates have started to go lower and Money Market earning while not bad, will follow rates lower. I call this, “losing money safely. “I know this sounds like an oxymoron, but you are losing purchasing power if your return is not keeping up inflation. There may be some options to earn more.
If you have not saved enough to retire when you would like to, it may be necessary to work an extra year or two. You are going to earn less money during retirement or you would have probably already retired. Working this extra time gives you more income, maybe extended health benefits and could increase your Social Security benefit. Every year before your full retirement age that you take SS reduces your benefit by about 6 ½%. If you delay starting benefit after full retirement, your benefit goes up 8%.
Baby Boomers are the first generation where most workers do not get a defined benefit pension. Only workers at government entities and big companies usually get pensions today. Because of this, Boomers are more responsible for their own retirement. Make sure you are prepared before you quit your job. It may be a challenge to find one that pays as much. Make an honest assessment of your situation and plan accordingly. This will allow your family to have the best retirement possible.