Will I Be Able to Retire?
Today, many of us are thinking, I'll never be able to stop working, and for good reason: In the 1970s, most Americans working full-time had access to pensions, which promised payments (after a certain number of working years) of up to 100% of your salary for nearly the rest of your life. That was on top of Social Security benefits.
Today, only around 20% of Americans have access to a pension plan, and that percentage continues to decrease. But don't panic: What's required is a retirement rethink. By changing your expectations somewhat — and altering your saving and spending habits — you can have a secure and comfortable life after age 65.
Old Think: Retirement means I'll never have to work again.
While for the lucky few with a large pension, this may hold true, those older than 65 are the fastest-growing group of workers — more than 7 million Americans over 65 are employed. This may be due to financial necessity in some cases, but also as we live longer, age 65 seems less like the end of our ability to work and more like the start of a new chapter of life.
New Think: Retirement means I'll work less, doing something I enjoy more.
Kathi Doak, a former department manager, was forced into early retirement but now uses her passion for knitting to teach at a yarn shop. Studies show that part-time work in retirement contributes to better overall health — and with medical costs rising to an estimated $240,000 for a couple in retirement, that can deliver way more than an hourly wage.
Consider, though, that working as you approach retirement age can impact your Social Security benefits. If you're collecting Social Security but haven't yet reached full retirement age and you earn more than $14,640 in 2012, you'll lose $1 from your Social Security benefit for each $2 you earn in your paycheck. If you turn full retirement age this year, you'll lose $1 for every $3 you earn above $38,880. Right now, full retirement age for those born on or before January 1, 1955, is 66. Check out more limits at socialsecurity.gov; factor in the implications of working, like taxes on your 401(k) distribution; and head to irs.gov for publication 575's info on how your retirement funds will be taxed along with work earnings.
Old Think: I'll own my own home when I retire.
Those in previous generations bought homes early in their careers and stayed put, entering retirement free of a mortgage. They also enjoyed a favorable housing market compared with what we have today.
New Think: I may still have a mortgage, but I'll also have a healthy retirement fund.
Think of owning your home as like owning one big stock. Why? Because it's part of a market — sometimes a losing market. Americans have lost trillions in home equity (the amount of your home's value that is actually yours after you subtract the mortgage) due to the fall in house prices.
So owning a home now no longer means having a guaranteed retirement asset: If you put all your money into your house, you may not have enough saved up to pay for what you'll need to live in that house! First, make sure you have an ample liquid-cash emergency fund. Even if you are not at risk of losing your job, it's great to have cash on hand for unforeseen home repairs or medical costs. Then, save for retirement first in tax-friendly IRAs. Many contributions can be deducted. If you max out your retirement savings, put more toward your mortgage. This way, should your retirement savings run out, you'll have home equity to tap if needed.
Old Think: As long as I'm socking money away, I'll be OK.
Since the advent of the 401(k) around 1980, more Americans have been acting as their own financial advisers, trying to figure out where to put the money saved for retirement. The stock market used to be fairly win-win as long as assets were held long-term — before the Great Recession, many assumed an average return of 7% to 8% in the market over 20 years. That's not the case anymore.
New Think: Where my money is invested counts as much as the amount I save.
Get to know your options: The term "value" in a fund's name means the fund generally invests in companies that appear undervalued, many of which pay a dividend. The word "growth" means the fund invests in companies that could grow over time; they often don't pay a dividend — meaning more opportunity for profit, but more risk, too. You can look up fund ratings at morningstar.com, where you can also see a fund's risk level. The balance you want in your 30s and 40s, when you have more time to handle risk, is 60% to 70% in a diversified set of stock funds, 20% to 30% in bonds, and the rest in cash equivalents. But once you're near or in retirement, make sure you have no more than 50% of your assets in the stock market and much more in bonds and cash — since you then have less time to recoup market losses, risk needs to take a backseat.
Old Think: I'll do anything to get my kids through college.
For decades, higher education has been the way to move up in the American workforce. Parents have mortgaged their homes to pay for their kids' college or, like my mother, taken on second or third jobs. But pensions used to be a given, and college bills were once, say, $15,000 a year rather than today's average figure of about $40,000 a year for private universities.
New Think: I need to take care of my retirement, or else my kids will be taking care of me.
When deciding between funding your retirement and paying for your kids' college, your future is the priority. Funnel at least 10% of your take-home pay into retirement savings. That may not leave much for college savings, but by cutting some expenses at home, you may have $100 or more a month to sock away for the kids.
Then research options that make college less expensive: Get info on 529 plans at savingforcollege.com, and find out how to work toward grants and scholarships at finaid.org. Federal student loans are a great deal, but be wary of private and parental loans which have high rates and rigid payment terms.
Is investing in my employer's 401(k) plan free?
About 70% of Americans are not aware that employer-sponsored retirement programs carry costs, on average around 1.27% of your account total. If you have the option of choosing between investing in two similar funds, consider those carrying costs: The difference between .7% and 1.7% in fees could mean losing more than $13,000 over 20 years if you're investing $350 a month in a fund with the latter cost and earning an average 6%!
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