November 29, 2018
You may have heard the rule of thumb, “Save 10% of your income for retirement.” But the question is: Is 10% over the course of your career enough to fund your retirement?
People say, “Life is short. Buy the shoes.” They’re wrong … life is long!
According to the Social Security Administration, one out of four 65-year-olds will live past the age of 90. You can calculate your own life expectancy with the Social Security Longevity Calculator on their website. (Mine came out to 85.7 years!)
If you retire at 65, and your life expectancy is 85 years, you have to provide income for 20 more years, with increases for inflation.
That’s no small feat — and many workers aren’t sure that they’ll be able to save enough. According to The Employee Benefit Research Institute’s 2018 Retirement Confidence Study, only 17% of workers are “very confident in their ability to live comfortably in retirement.”
How can you move into the retirement confidence zone?
Find out if and when you are on track to retire.
Consult with a financial planner to get a second opinion on your retirement plan. Stick with a financial planner who is “on the same side of the table as you are,” one that follows a fiduciary standard of care. This means the planner acts in your best interest, not their own.
The Certified Financial Planner Board of Standards requires Certified Financial Planner Professionals (™) to follow this high standard. According to their Rules of Conduct, CFP® professionals are required “to put your interests ahead of their own at all times and to provide their financial planning services as a ‘fiduciary.’”
Financial professionals who are part of the National Association of Personal Financial Advisors (NAPFA) sign a fiduciary pledge each year and subscribe to a code of ethics.
Working with a fiduciary-based financial planner, you can run a calculation and get advice on your savings percentage and investment choices. If you are off track, your planner will make recommendations on how to get on track.
You can find a CFP(TM) professional through LetsMakeAPlan.org or on the NAPFA site. Alternatively, you may have financial planning advice available through your employer’s financial wellness program, your Employee Assistance Program, or your 401(k) provider.
Ways to increase your retirement readiness
- Fund your Health Savings Account, but don’t use it
Your Health Savings Account (HSA) is a pre-tax savings account for employees with high-deductible medical plans. In 2019, employees that qualify can invest $3,500 a year per individual and $7,000 per family in an HSA. There is a “catch-up” contribution of an additional $1,000 if you are age 55 and older.
This is the only type of plan that has triple tax benefits: pre-tax deduction from your paycheck, tax-deferred growth of the investments, and tax-free withdrawals if used for approved medical expenses.
A nice feature of an HSA is if you don’t use your funds, the account can simply grow, and you can use it later. You don’t have to spend the funds each year, as you do in a flexible spending account (FSA). The money can just roll over year over year.
Financial planner tip: While you are working and have a salary coming in (if you can afford to), pay your medical expenses out of pocket. Let your HSA grow to use for medical expenses in retirement instead. Wouldn’t it be nice to have a nest egg in retirement just for medical expenses?
- Increase your contributions to capture your employer match, then eventually max out
This is common advice, and you might be tired of hearing it, but it’s so important, I have to mention it. Make sure you contribute enough to your 401(k) to capture your company’s match. If your employer matches up to 6% of your salary, save 6% of your salary, even if you have to scrimp and save.
If you aren’t at the maximum contribution, which for 2019 is $19,000(with an additional $6,000 as a “catch-up” contribution if you are 50 and older), then increase your salary deduction percentage as much as you can now.
Financial planner tip: If you aren’t at the maximum contribution, enroll in “auto-escalation” in your 401(k). This plan will automatically increase your contribution by a set percentage — 1% or 2% — per year. This may coincide with an annual raise to help you save more!
- Invest in your Employee Stock Purchase Plan
If you work for a publicly traded company, you may have the ability to buy company stock at a discounted price through a payroll deduction plan called an Employee Stock Purchase Plan (ESPP). While there may be companies that offer an ESPP in their qualified retirement plan, I am referring to the after-tax program.
You simply purchase discounted shares of company stock with after-tax dollars. The benefit to you (beyond the discount) is there is no age limiton making withdrawals — you don’t have to be 55 or 59 1/2 to sell your shares.
Companies usually require a short holding period (like six months) to receive the discounted shares.
If you hold the shares at least for 12 months and one day, you can receive the tax-favored long term capital gains tax treatment.
Financial planner tip: Have you ever heard the term, “Don’t put all your eggs in one basket?” This age-old adage is talking about having a high concentration of one single investment. If that investment goes south, so do your plans. Financial advisors recommend not having more than 10% of your assets in one security.
When you invest in company stock through your employer’s plan, and the stock is doing well, it can easily grow past that 10% guideline! If it does, sell some of your shares and reinvest those assets to a broadly diversified portfolio.
Your 401(k) is a wonderful retirement savings vehicle. It’s not the be all end all. Just because your company offers a 401(k) and provides a company match doesn’t mean it’s going to be enough.
Your best bet is to get some advice on whether or not you are investing enough to fund a comfortable retirement and keep on saving.
To read the original article please visit Forbes.