Q. I have not been the greatest saver in the world, and to make matters worse, Ive been unemployed for the past year. The meager savings I did have is depleted. The good news is that I am now employed in what I think is a pretty well-paying and secure position. Im enjoying my work and plan to work 15 more years until I am 70. The company offers a 401(k) plan with a very modest match, but I guess that is something. Id like to maximize my savings now for my retirement, but Im having trouble getting motivated because I think its a lost cause this late in life. Do you have any advice on how to make the most of these next 15 years and catch up, or is it too late? Ive read that it may be wise to take my Social Security as early as possible to increase my investments. Do you agree?
A. Glad to hear of your employment. A year is a long time to be unemployed but not unheard of in this economy. Since 2008, for workers 55 and older, the average number of weeks of unemployment is 56. It is not too late to begin saving for retirement. You need to start today; every day you delay, it will just get more difficult to build a retirement nest egg. The biggest money-making asset anyone has is time. It would have been nice if you had been a better saver in the early years, but you cant change the past. You should develop the attitude that you will spend less and save more. If you have any expensive debt, pay it down, and dont take on any new debt. Take your lunch and snacks to work; skip the expensive coffee drinks and pastries. Save eating out for special occasions.
Your goal should be to maximize your savings for retirement. You are allowed to contribute an extra $5,500 to your 401(k) and an extra $1,000 to an IRA because you are older than 49. The current annual contribution limit on 401(k) plans is $17,500, so with the 50-and-older catch-up, you can save up to $23,000 in your company plan, plus their match. The current annual contribution limit for IRAs is $5,500, so with the catch-up, you can contribute up to $6,500. If you are able to make the maximum contribution to both the 401(k) and the IRA for the next 15 years and achieve a 6 percent rate of return, you will have accumulated more than $686,600.
The earliest you can take Social Security is age 62. Before full retirement age, your benefits are subject to an earnings test. Benefits will be reduced by $1 for every $2 more than $15,120 you earn. Your benefit at age 62 will also be about 30 percent less than your benefit at full retirement age. Once you reach full retirement age (age 66 and 8 months for those born in 1958), your earnings from work will not result in a reduction of Social Security benefits, but 50 to 85 percent of the benefit may be subject to income tax. Your benefit will increase by approximately 8 percent a year from full retirement age to age 70. If you have a normal life expectancy, the larger benefit amount will provide a more secure financial future.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624