Five Savings Tips for Soon-to-Be Retirees

Smart Money lists five savings tips for soon-to-be retirees -- which I'll cover in a minute -- starting with the following facts about what Americans actually have saved up for retirement:

About 65% of people age 55 and older have less than $100,000 in retirement savings; just 37% have saved less than $25,000, while around one-third have less than $10,000, according to Employee Benefit Research Institute’s 2010 Retirement Confidence Survey.

We've talked a lot here about Social Security and whether it's a retirement program or an insurance program, but from the looks of it, most people are counting on it as a retirement program -- using it to fund a major portion of their retirement. Otherwsie, wouldn't they be saving more?

Ok, that's getting me a bit off track. Here are five ways Smart Money says anyone can boost their retirement savings:

• Max out your contributions
• Use your catch-up provision
• Set up a side, tax-free savings account
• Consider rolling over to a Roth 401(k)
• Hold off taking Social Security

My take on these:

1. I've been maxing out my contributions for years and plan to keep doing so for a long, long time.

2. One advantage of turning 50 is that you can save even more in tax-advantaged accounts. I still have a few years to get to that point, but when I do, I'll be saving as much as I can.

3. We have some IRAs that we've rolled-over from 401ks on the "side", but that's it.

4. I still haven't decided whether or not to roll over some or all of our IRAs into Roth IRAs. Everything I find seems to put it at a wash or slightly advantageous to do so, but all the costs are up front. I'm not sure I want to pay a hefty amount now and hope for a good/profitable outcome 20 years down the road. Anyone made a roll over to a Roth this year? Why or why not?

5. I'm not even counting on Social Security for retirement. I'm saving like it won't be around (whether it will be or not is still TBD) and if I get anything, that will be "found money" to me. As such, I should be able to postpone taking it for a good amount of time, though I'll need to run the numbers to see when taking SS is the best deal.

Anyone else out there thinking of retirement? What are you doing to save for it?

Comments

[segfault]

Charlie Munger, vice chairman of Berkshire Hathaway, says he intends to convert a regular IRA to a Roth this year, for whatever that's worth.

[Robert]

My wife and I are maxing out our Roths, Sarsep, and Simple accounts. It's now up to $30k per year. I just turned 50 and last year, paid off the house. So with no debt, $200k in deferred accounts, and a military pension, we're doing alright. Plus, starting this year, now that the house is paid off, I can start building capital outside the retirement plans for other investments.

I plan on shutting down my current business within 10 years to start maxing out my numerous hobbies. :)

I did a partial conversion to Roths this year and I'll probably leave it at that. I like having some money in tax deferred and some prepaid to reduce the upfront cost while still providing some flexibility later.

[Apex]

All of this advice is good advice. It's also obvious advice. It's also useless advice for most people. This is not a cricism of you FMF, its a criticism of the types of things that places like Smart Money put out.

All these places do the same stuff and I consider it headline bait and switch marketing. They offer you 5 tips like they are going to take someone who has very little or clearly not enough savings and give them the secrets to "make it." The people are thinking hey, maybe this is the secret I have been looking for. Lots of people are looking for secrets. They believe if they could just learn the secret that other people have learned they could get there too. Of course what is offered is just basic financial advice. Now that advice is the actual secret but that doesn't help hardly any of the people who need to save more. The whole list involves saving more money than they have currently been saving. There is actually nothing here that can't be done without the 5 things on the list. You can save more without having a catch up provision in your IRA. You can save more without rolling to a ROTH. If you max out your contributions then obviously you will be saving more.

The real advice is spend less, save more, work longer and don't retire as quickly. Thats what the list boils down to. But that means sacrifice and not getting everything you want.

People see that list and they think well duh, if I had the money I would do that but I don't. And they go back to looking for the "secret"

People need constant repeated 2x4 up side the head wake up calls: SPEND LESS MONEY, SAVE MORE MONEY, YOU DON'T NEED TO BUY EVERYTHING YOU WANT RIGHT NOW, YOU CAN LIVE WITHOUT SOME OF THE THINGS YOU THINK ARE ESSENTIAL, ETC, ETC, ETC.

And FMF does a great job of constantly repeating that message.

"Smart" Money, not so much. Their name is false advertising.

[MC]

To prepare for retirement? I'm 48 yo and saving money (duh)!

The main new thing I've done this year is to (finally!) start focusing more attention to mitigating my current fed and state income taxes. Which due to my salary and the state I live in, are pretty high.

My company has had a pretty good pension plan & I've been vested for 13 years, but they announced its phase out in 5 years to be replaced with a 401K/403b match. I will still get a pension but it won't be enough. So this year I set up a Roth 403b. No match until 5 years from now, but I'm contributing the max allowed anyway.

I set up and use a health care FSA and dependent care FSA to help reduce my taxable income.

I have a very old, traditional IRA. Still thinking it over but I probably won't roll it into a Roth for the same reasons as FMF listed (large up-front cost vs. small and possibly dubious benefit in the future).

I stuck the largest annually permitted amount of cash into my life insurance company's "certificate" fund which is liquid yet compounds tax - free at no less than 4% (and may go higher). I plan to do the same next year.

To try to reduce the amount I will have to spend on my kids' college costs, I set up conservatively invested 529 accounts. The combined interest rate is only about 2.9% but at least it's tax free. (& I'm encouraging my kids' academics, hoping for some merit scholarship $!) Unfortunately, in my state at my income level there are no additional tax benefit with using the 529.

I ref'd my small mortgage for 15 years at 4.5% last year, but I'm still prepaying it so it will be finished in 4 years. Because I owe so little the tax benefit of the keeping the debt is negligible. And I'd rather pay it off and increase my cash flow in a few years so I can invest more.

I'm also saving an additional $2000/mo that currently goes just into money markets and CDs. I was planning on putting about 1/2 of this into an index fund, but I got scared off with the market veering around this month. Maybe later.....

[Money Reasons]

It's a shame that we've let Social Security stay in the state that it is. I'm not close to retirment yet, but I think it would be a nice security net, just in case.

We are in so much debt already, I don't see how the government can fix it without some unfair tax practices, especially now that we have to try to pay for health care...

As for saving, I still invest in the stock market, but it's been really been hurting my feelings lately!!! :(

[Budgeting in the Fun Stuff]

1. I contribute the minimum to get the maximum company match (6%).

2. I have 23 years before I'm 50 and hope to be retired in 25 years, so we'll see if I take advantage.

3. We have a 401k, Roth IRA, pension, a Scottrade account, and a long-term emergency fund...I think we're pretty covered.

4. Not applicable.

5. We are also saving like SS won't be around even though I receive letters assuring us we'll get at least 75% of expected benefits. We'll also figure out the best time to take it if it exists in 30 plus years...

[Apex]

@Money Reasons,

Social Security is not in that much trouble. It will still be here 75 years from now. It's actually easy to fix. If the full retirement age was slowly raised from 66 currently (its going to 67) up towards 70 and continued to raise to about 73 over the next 25 years or so all of social security's problems go away and its solvent for 100 years. Modern medicine and all that costs us is helping us live longer. The idea that we can pay into a system for 40 years and draw out for 25 years when in the past we drew out for 15 years before we died is really pretty dumb. The solution is simple, easy, and obvious. But it's also a sacred cow and no one wants to touch anything in it. Sooner or later they will do something that will adjust it so it's solvent. It might involve slight tax increases and slight reductions in COLA increases and slight age of eligibility increases but it's actually easy to fix social security. The one risk is that if you save too much money they might means test it and say if you are too "rich" they won't let you draw. That will be tricky to do but they might do it. But rest assured for the majority of people who don't have all that much money, social security is never going to go away. People are a bit paranoid about it but the politics of it is pretty clear and there is no way there can ever let it die.

Medicare is something entirely different. That's a complete disaster and without drastic tax increases and/or benefit reductions, I have no idea how that program stays solvent 40 years from now.

[Stephan]

Good tips, the maxing out contributions part is the one i am working on now. i get a company match, so thats free money, and it lowers my taxable income, so it really is a win win situation all around for me. It blows my mind how many people dont at least take advantage of the free money available to them through their employer.

Preferred Financial Services

[Rick Francis]

>made a roll over to a Roth this year? Why or why not?

Ask yourself do you want to make an extra contribution to your Roth IRA? Because a conversion is just like sheltering the amount you pay in taxes when the tax rates now and in retirement are equivalent.

Example: Say you have $1000 in a standard IRA and $250 in cash to cover taxes for the conversion. You are going to pay 25% today and in retirement. To make the numbers more concrete assume that before the money is taken out it will double.
If you keep the standard IRA: $1000 -> $2000 you take it out pay 25% in tax and have $1500.
The $250 doubles to $500 but you have to pay taxes on the investment- your total is $2000- taxes on your $250 investment.
If you convert: The $250 goes to taxes now the $1000 double and your total is $2000.
The difference with conversion is you didn’t have to pay taxes on your $250 non-sheltered investment- effectively you just made an extra $250 to your Roth account.

-Rick Francis

[Dr Zara]

I guess they should raise age for Social Security to 90, that way it will not go bankrupt and most would be dead by then to worry about it. Also a friend of mine with 4.2 million dollars in his account, he and his wife showed their social security cheques laughing at it-- they didnt need it, but greed factor is always there.

[Apex]

@Dr Zara,

You can make jokes about it but people were eligible for full benefits at age 65 in 1935 and now 75 years later life expectancy has expanded 10 years. People are healthier and capable of working much longer than they used to. In 1935 the work force did a large amount of physical labor, now most labor is not physical in nature. So what is so special about 65. Is there a God given right to retire and get social security funded by the labor of others at age 65? Why 65? Why not 53 like Greece?

What I propose is not that extreme. It's already being explored by many who are looking at the problem. It's almost certain that some form of benefit cut or age increase will eventually happen. So in light of the changes in life expectancy, health, and type of labor being performed in the economy, I am happy to entertain your justification for why we should not raise the retirement age to keep it in line with the original intentions of the SS program which as Roosevelt indicated when they instituted it was to provide a means of support for those who were no longer able to generate an income. Take a good look at that statement. It has nothing to do with providing a comfortable retirement. It's to provide for people after they can no longer provide for themselves.

Of course making jokes about making it so no one can ever draw cause they are all dead is always a good debate tactic too.

[Ross]

FMF - I'm sure you've seen the best reasons I've seen for converting to a Roth:

1) Lower the amount of income tax you may need to pay in years to come - but this is all based on hypothetical tax brackets. The more money you pull out of an IRA to pay for your living expenses, the higher your tax rate. You can offset this with the Roth.
2) Lower the amount of estate tax your children would need to pay, as well as the taxes they may be responsible for after your death. It will lower your estate, because you had to pay taxes on in...therefore you saved less and you're worth less. The lower taxes for your children because they won't be required to pay income taxes when they would withdraw money from a leftover IRA.

In my experience (I work in the investment field), this COULD certainly be beneficial for most people. Realistically though, it ends up being more of an "estate planning" question than a "trying to figure out the income tax brackets" question.

[Georgia]

I retired at 69 with $78k in my 503b from the state. I had started late - around age 50. A good portion of that time I was maxing my account out - 25% of my gross. The state only matched $25, but I still took advantage of it. I have SS and 2 small pensions, mine and my late husband's. We both took smaller pensions to leave them 100% to surviving spouse. Right now, I am trying to save his pension. It may help me greatly in the future.

I have no stocks or bonds. My 503b was savings only, so I did not loose anything in the downturn. I only need to withdraw the minimum once a year and use it to fix my home.

In fact, doing the annual withdrawals (not in 2009), I am doing very well. When I retired I took out money to pay off any and all debts. We owned our own home. (My property taxes run less than $300 a year.) But, since 1/2006, I have withdrawn around $14.7k. Yet, my account when I withdraw the minimum in Dec., will only be $1,500 less than my beginning figure. And this is with a current interest rate of 2%.

And, about SS - I heard a man on the radio years ago who was on Roosevelt's committee to start SS. He said they never figured it would be able to support itself forever. They knew that eventually it would have to come out of General Revenue. In this day and age, what revenue?