In October 2008, the Great Recession began hitting most Americans hard. Over a few months, the value of retirement savings in 401Ks and IRAs plunged by up to 50%, most home values dropped (precipitously in some areas), and many workers experienced pay cuts or lost their jobs. In the years since, some retirement accounts (401Ks and IRAs) have climbed to their pre-loss levels, but not all, and hard times continue.
Unemployment and underemployment remain high. Pay cuts have shrunk income for many workers. Retirement savings still appear vulnerable, depressed, or inadequate for many. For example, an investment firm that manages one of the country's largest 401K plans reported in late 2010 that, during the year, 11% of 401K account holders had taken early withdrawals or loans from their accounts, typically to cover hardship expenses (such as mortgage payments) or allowable expenses (such as college costs for children).
If your retirement benefits or savings plans have been hard hit, or if you feel that you have inadequate savings, what can you do? How can you maximize the opportunities to boost and secure retirement savings? The following tips from retirement and investment experts may help you plan.
Assess your retirement savings and plans
The first step: assess where you stand now on meeting your retirement goals.
- How many years do you have to retirement? The fewer years to retirement, the more aggressively you may need to save, using strategies such as those below.
- What is the status of your current retirement savings account? A recent Associated Press analysis of data from the Employee Benefit Research Institute (which is nonpartisan) indicated that, while overall averages showed that 401K accounts had rebounded to pre-recession 2007 levels, the largest gains were made by individuals who had been on the job 10 years or under, while accounts of those who had worked from 10 to 29 years still were 5% to 8% under 2007 market height and those with 30 years or more on the job had just passed 2007 amounts. Accounts of all savers, of course, don't match these gains. So the first step is to see where your account is and what balance of investments you have in the account.
- How much will you need for your retirement as you envision it? How close are you to reaching your goal? What is the gap? Which strategies (including those below) may help you close the gap?
- How long do you have to save for retirement? What is your tolerance for risk? How balanced is your account among savings vehicles offered by your plan?
Typically, the fewer years to retirement the less risk you would want in investment options. For example, over the past century, investment in stocks (individually or in funds) has offered the greatest average return, but the stock market is also highly volatile and values can go down quickly as well as up. The key concept is over time. If you are a younger worker who has chosen stock funds for a major part of your 401K account, for example, you typically have time to recover from a big drop in values such as those that occurred in 2008. But if you had planned to retire in 2009 or 2010, then your target retirement date hit when your retirement savings had probably lost a great deal of value. Picking the right risk level and strategy is, therefore, important. For more information, you may wish to consult the information provided with your employer-sponsored 401K plan and/or consult the investment advisors at CCU.
As the last few years make clear, taking into consideration current economic factors is always important, as is assessing and making adjustments to your plan on a regular basis.
Maximize your retirement savings
401K Plans. If you have a 401(k) plan, first make sure that you are contributing enough to take advantage of any matching funds your employer might contribute. If you aren't contributing the maximum allowed, some experts suggest increasing your contribution 1 percent every year. For 2011, the maximum allowed is $16,500. If you are over 50 the maximum increases to $22,000. The limits of your individual plan may be lower. Be sure to match investment choices within the plan to the level of risk that you are comfortable with.
IRAs. Consider saving more with an Individual Retirement Account (IRA). With an IRA, individuals can save up to $5000 a year, $6000 if you are over 50. This means that married individuals opening separate accounts can save up to $10,000 a year, up to $12,000 if both are over 50. The most common forms of IRAs are the Traditional and the Roth.
With a Traditional IRA, contributions are generally tax deductible. Later, distributions from the account are taxed as ordinary income. There are no income limits for opening an IRA. An account can be opened anytime if the individual hasn't turned 70 1/2 before the beginning of the year. Distributions can begin at age 59 1/2 but must begin by age 70 1/2.
With a Roth IRA, contributions are not tax deductible; you pay taxes on the money before you make the contribution. The fund grows tax-free, and you do not have to pay income taxes on disbursements. There are income limits for opening a Roth IRA. Check IRS publication 590 for specifics, but generally singles who earn $120,000 or more (adjusted gross income) and married couples who earn $177,000 or more cannot open a Roth IRA as of 2011. Distributions can begin at age 59 1/2. Since there are no mandatory distributions, you may leave funds in a Roth IRA for as long as you like.
You can have both Traditional and Roth IRAs. Your yearly contributions to all of your IRAs (Traditional and Roth) cannot exceed $5000 per individual ($6000 if over 50).
Increase your personal savings
Use payroll deductions or automatic transfers to savings to increase your savings beyond retirement accounts. You may not miss the money if it doesn't show up in your checking account. If you are within a few years of retirement, assessing where you may be able to cut back on expenses now to save more aggressively may help boost the money you can save toward retirement. Consider placing these savings in one of the many savings vehicles offered by your credit union, ranging from IRAs (if you don't have one) to CDs, savings and money market accounts.
Pay off credit card debt
Credit card debt is typically high interest debt, so you want to get rid of it. Paying off debt while you're still working means you won't have to use retirement income to pay for it. After the debt is paid off, continue making those payments—into your savings account or retirement account.
To build your savings, consider delaying your retirement for a few years. Various surveys indicate that many individuals near to retirement when the Great Recession hit have adopted or plan to adopt this strategy. Extra years working mean more money saved for retirement and a delay in when you start drawing on retirement funds.
Not taking early retirement and working longer can also boost income from Social Security. People retiring at age 62, for example, make about 25% less than those waiting to retire at their full retirement age, according to the Social Security Administration (SSA). You can use the SSA Online Retirement Estimator to plug in various retirement dates to see how they might affect your Social Security income.
Working part-time in retirement can be a good way to extend your retirement funds. If you want to work part-time when you retire, experts suggest that you determine what you want to do and where you want to work before you retire. There are many ways that you can earn some income in retirement. If you like your current job, you may ask if you can transition to working part-time or as a project-based consultant. Consider creating your own opportunities through consulting or freelance work. Investigate what opportunities your hobbies or other interests may provide. A number of retail outlets also employ older workers part-time and this number should increase as the economy continues to improve. Keep in mind, there are income limits while on SSI and this should be discussed with a tax professional prior to obtaining employment.
Putting it all together
Solving the retirement savings puzzle and catching up if you started late or took a blow from the recession requires a multi-component solution, as this report suggests. The more quickly you assess your current situation and develop a strategy to make progress, the greater the benefits you'll reap. Working with a registered Financial Advisor is recommended to help you reach your retirement goals. Consider talking with one of CCU's independent professional advisors. They offer personalized financial strategy options tailored to your unique situation, preferences and goals.
For more information
StraightTalk 50+ Guide Retirement planning
Taking the Mystery Out of Retirement Planning - an online guide from the Employee Benefits Security Administration of the U.S. Department of Labor
Ultimate Guide to Retirement – from CNN/Money
Jane Bryant Quinn in the AARP Bulletin, "When a Savings Plan Goes Bust: Prepare a Plan B for Retirement, Just in Case"
Prepared for Corning Credit Union by Remar Sutton & Associates, May 2011. All rights reserved.