In a recent survey by the American Institute of Certified Public Accountants (AICPA), eight out of ten CPA financial planners reported that they had at least one Boomer client who will be postponing their retirement and half of those clients said that delay would be four years or longer. A recent Harris poll reveals even more worrisome news for Boomers, finding that 25 percent of 46- to 64-year-olds have no money at all saved for retirement. If that’s not enough bad news, the Wall Street Journal reported that those Boomers who do have retirement savings might not have enough to last them the rest of their lives. The Journal went on to report that the 401(k) retirement accounts held by median households headed up by 60- to 62-year-olds have less than a quarter of what they will need to maintain their standard of living in retirement.
This certainly is scary, especially if you’re thinking, “That’s me they are talking about!” Don’t despair. You can still get on track or find a new path for your retirement years.
Here are seven tips for you.
Track your expenses now. Ok, you know what you spend on the big-ticket items – mortgage, rent, car payments, insurance. But it’s the rest of your spending that adds up quickly. Track your expenses for three to six months. Start writing down everything you spend or list your expenses in the past three to six months. (I have more detailed tips on my blog at www.texasdivorcefinance.com. You don’t have to be in a divorce to benefit from those tips.)
Think about what will change. Think carefully how your spending will change when you retire. Will you want to make repairs to or remodel the house, because you will have time to notice what is falling apart? Will you want to travel? Will you finally have time for that vegetable garden? Surely your dry cleaning bills will fall.
Create projections. Yes, financial planners can create sophisticated projections, but you can use a retirement calculator online to find out if you have enough money to retire. There’s a link to a Retirement Shortfall Calculator on my blog under Website Links.
Tips for using the Retirement Shortfall Calculator:
Before you start popping numbers in the boxes, first read the “Definitions”. They really do matter.
Rates of return – choosing the number for this box is like using a crystal ball. I recommend that you fill in all the other boxes first and then work on this one. First put in 2% and see the result. Then put in 4% and see how the result changes. Take it up to 8%. It looks better there, doesn’t it? Actually getting your estimated rate of return in real life is a whole different matter.
Federal tax rate – this is your “marginal” tax rate, the rate of tax on your highest taxed dollar. To help calculate that, there’s a link to a Marginal Tax Rate Calculator on my blog under Website Links.
Number of years in retirement – assume you will live 10 years longer than the age of your longest living parent or grandparent or age 95.
Expected inflation rate – use 3.0% or use the default of 3.1%.
State income tax – thankfully, it is zero in Texas.
Overcome a shortfall. If you don’t have enough money for the retirement you want, you don’t necessarily have to work longer. You can downsize. Do you have a whole life insurance policy with cash value? You could use the cash or do a 1035 exchange. That is a tax-deferred arrangement that lets you use the cash value to buy an annuity.
Maximize Social Security. Consider postponing the start date for your Social Security benefit payments. A Boomer who qualifies for full benefits at age 66 can get another 32 percent of the benefit by waiting until age 70.
Evaluate investments. Boomers should reassess their investment allocation to ensure they’re getting appropriate returns – and that they are diversified to weather future economic storms.
Develop a transition plan. Few people stop working the day after they turn 65. They are transitioning out of the workforce by going part-time or turning a hobby into a business. If you don’t have quite enough to retire comfortably, think about part-time or consulting work that could help you transition from a full paycheck.