What to save, and when

CorrespondentSeptember 1, 2013 

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The right steps to take in your 20s, 30s and 50s for a financially secure future.

LISA MERTINS — MCT

Almost half of all workers are worried that they can’t afford a comfortable retirement, according to survey led by the Employee Benefit Research Institute.

And no wonder, company pensions are becoming rarer, 401(k)s are depending on a volatile market, and Social Security’s trust fund reserves will be depleted in 2033 without Congressional action, and then the program will only have enough income to pay 77 percent of scheduled benefits. It’s unknown how the program will change, and that adds uncertainty for people planning for retirement.

But being financially prepared is a must. Here’s what you need to consider for the different stages of your life.

In your 20s: Save

The earlier you start to save money, the more you can give your funds time to grow.

Your first priority is to contribute enough to your 401(k) to get any match offered by your employer, said Will Holt, a certified financial planner at Financial Symmetry in Raleigh.

Michael Thompson, 59, started earning his company’s 401(k) match early in his career, following his father’s advice to “pay yourself first” by saving a portion from each paycheck.

“The key is to put it in and leave it alone,” said Thompson, a lobbyist for Dominion North Carolina Power who lives in Raleigh when the General Assembly is in session. Building up his 401(k) is one reason why he feels prepared to retire.

After getting your company match, pay off credit card debt, and resolve not to carry balances in the future because the interest you pay is money down the drain. Another step, said Holt, is to pay off student loans, especially if they have high interest rates, before saving additional funds for retirement.

After that, Holt advises clients to invest in a Roth IRA. Contributions are taxed as they go in. It makes sense to be taxed now since your earning potential is probably going to put you in a higher tax bracket later. After fully funding your Roth – the maximum contribution this year is $5,500 unless you are age 50 or older – you can go back to funding the 401(k).

Strive to put at least 10 percent of your pre-tax income in a retirement account, said Steve Gaito, a certified financial planner and director of My Retirement Education Center in Raleigh. Do this each year for your whole career to get in the habit of saving.

“Don’t procrastinate,” said Bob Haynes, 56, a Raleigh resident. “It will give you peace of mind to be prepared.”

Haynes feels confident about his eventual retirement from his job at the N.C. League of Municipalities but wishes he had done more to manage his 401(k) funds earlier.

Holt advises 20-somethings who want to manage their 401(k) to understand fees. He also said to keep investments simple by looking into a retirement target date fund or lower cost index funds. Also, avoid trying to time the market, he said.

In your 30s and 40s: Prioritize

When the big life events in these decades – having children, buying a bigger house – compete with retirement goals, prioritize where your money goes.

“Especially for a home purchase, set an appropriate level of home that you can afford and still achieve long-term retirement goals,” said Holt.

In your 50s: Budget

Holt asks clients to track their spending for 12 months to get a true sense of their lifestyle and what they will need as an annual budget in retirement. He recommends using the free personal finance website www.Mint.com.

He also advises building in additional funds to the budget for when life throws in surprises. Don’t assume that your expenses will be reduced when you retire.

“That’s not what we see with clients,” Holt said. “Depending on individual circumstances, spending may actually go up.”

Do a trial run of living on your annual budget to see whether it’s realistic.

It’s important to diversify the sources that will provide your retirement income through products such as bonds, real estate and annuities, said Gaito.

People who retire at age 65 should plan for the possibility that they will live 30 more years, according to the U.S. Department of Labor’s “Taking the Mystery Out of Retirement Planning” publication. That means there is a chance you may eventually need long-term care. The question Holt poses to clients about long-term-care insurance is: how much risk are you willing to take? The premiums are expensive, but they offer some protection over a catastrophic event.

If you need more money in your accounts, think of ways you can cut living expenses. If you’re paying for your child’s college fees, your student can keep costs down by attending a community college for the first two years of a four-year program. That’s an option Holt thinks will become more popular.

In your 60s: Maximize

Do you know how to get the highest Social Security benefit possible? Gaito said few people do.

You can start receiving your benefit at age 62, but you will receive a reduced benefit if you elect to start receiving payments before your designated full retirement age. The full retirement age for people born between 1943 to 1960 increases gradually from 66 years old to 67 years old.

Decide whether you can wait until after your full retirement age to receive Social Security benefits. If you keep working, you will be contributing to your lifetime earnings record, and that may mean higher benefits. Additionally, if you were born in 1943 or after, 8 percent will be added to your benefit for each year that you delay signing up for Social Security beyond your full retirement age, or until you reach age 70.

Some people don’t know about options such as the spousal benefit, said Gaito. If you’re married, you may be able to apply for half of your spouse’s full retirement benefit when you reach your full retirement age. This allows your own benefit to grow at 8 percent every year. Complete the restricted application for spousal benefits so you can change to your own benefit at a later date.

But do not expect Social Security to satisfy all your financial needs. Benefits this year are only replacing 41.7 percent of pre-retirement income for the average worker.

Also, do not make the decision of when to retire based only on your age or number of years at a company.

“Retirement is when you can walk away from your job and meet all your living expenses,” Gaito said.

This might mean you have to work longer than planned to get your accounts in a healthier state.

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