Ask any retirement planner, and he or she will say the same: Start saving as soon as possible, as much as you can.
For some people, that’s easier said than done, and while one should start saving in his or her 20s and 30s, most are closer to 50 by the time it sinks in that retirement is only about 15 years away.
“You constantly have to be reminding people that you need to prepare, and by preparing, I mean you need to put away as much money as you can for retirement,” says Ray Bening, who has worked in the financial planning industry for almost 30 years.
Rob Mathews, an assistant vice president who works with retirement and investor services for Principal Financial Group, says company surveys, along with his own experience, shows most people don’t think about retirement until they are five years away from it. And generally speaking, he says most Americans are not saving enough for retirement.
People are retiring at a later age, according to an August 2011 survey by the Center for Retirement Research at Boston College. The survey reported since the mid-1990s, the age for men has risen from 62 to 64, and for women, from 60 to 62.
Mathews says many factors play into this including eligibility for Social Security, health, job issues and longevity. People tend to live longer, which means one could feasibly live 30 years past retirement age. This means more money is needed for a potential retirement that could last almost as long as the person’s working career.
Regardless of when a person plans to retire, Mathews and Bening say one should think about retirement as part of their overall financial planning and start to save as soon as they enter the workforce.
Bening says an easy first step is to take advantage of employer-sponsored retirement plans such as 401(k) accounts and to contribute the maximum dollar amount that the company will match.
“If you’re working and there’s an opportunity to participate in a retirement plan and you’re eligible, you should do it. Period. The end,” he says. “It doesn’t matter what your age is.”
Bening says the benefit of a 401(k) plan is that it is portable. If an employee leaves a company and goes to another, he or she can move the vested account balance into a new account at their new job. A person’s own money is always 100 percent vested and can be moved. Typically, it takes five to six years until the entire account, including the company’s match, is vested and can be moved into a new account.
Money that is put into a 401(k) plan also is deductible from a person’s income and is tax-free, which is another advantage to saving, Bening says. In addition, any contribution added by the employer is also nontaxable and does not have to be declared as income.
Retirement planning is a mix of playing offense and defense, Bening says.
For example, on the defensive side, those planning need to consider what would happen if they became sick or injured and could not work. These people should have enough disability insurance to cover their income and their financial obligations. In addition, life insurance is important to protect family members in case of death.
He says these types of insurance can be purchased at an affordable rate — and disability insurance premiums remain the same once they are acquired — so it’s better to be covered at a young age when the person is more likely to be in good health.
According to a recent study by the Employee Benefit Research Institute, about two-thirds of current retirees left their jobs earlier than expected because of health or a disability issue. The institute is a Washington, D.C.-based group that works to improve employee benefit program through research and education.
One of the biggest financial risks for the middle class, Bening says he recently read about, is the unfunded liability of potential long-term care. He says people need to make sure they have enough insurance to cover this type of care, which could include living in an assisted living facility or a nursing home.
“The unfunded liability of long-term care can wipe you out,” he says.
Mathews agrees that health care cost is at the top of the list of life events one needs to consider when planning for retirement.
A moderately healthy, retired couple may need as much as $250,000 to pay for unreimbursed health-care expenses during their retirement, according to the Employee Benefit Research Institute.
In addition, Mathews says other factors to consider when planning for retirement include whether the retirees could still be paying for their children’s college tuition and whether they’ll be helping to care for their own elderly parents. He says a financial planner can help an individual sort through these issues and others when creating a plan.
On the flip side, an individual should have a personal investment program. Bening says an easy way to start this — in addition to the employer-sponsored account at work and a personal savings nest egg — is through automatic transfers from a person’s checking or savings account into a mutual fund account. The earlier a person starts to save, the more likely it becomes part of their lifestyle and is easier to do.
“The biggest thing is to understand and let the time value of money work for you,” he says. “A little bit of money put away today as a young person becomes a lot of money later. It’s the discipline of forcing yourself to do that.”
Bening says it varies by person as to how much money an individual needs to have saved through cash, retirement accounts or investments. A good rule of thumb is to consider how much annual income an individual or couple is used to having and start from there.
Financial planners recommend an individual take out no more than 5 percent from his or her 401(k) or retirement account or it will deplete the account, and the person will not be left with enough for retirement. So in order to sustain an income of $100,000, for example, the person must have at least $2 million saved.
Mathews says Principal’s research suggests an individual or couple needs at least 85 percent of their income a year during retirement, so they should evaluate all of their sources of income from Social Security and personal savings to 401(k) plans and other retirement accounts to determine whether they can meet that goal in their golden years.
In order to reach this goal, he says a person needs to save about 11 percent to 15 percent of his or her income on average throughout a career. Much of this savings can be realized — up to 9 percent — through a company-sponsored retirement plan if the person contributes the maximum amount and the employer matches a portion of it.
But, Mathews emphasizes, there still is no set dollar amount because it depends upon what the person’s goals are in retirement.
Some individuals may want to travel, while others are content with staying home and occasionally going out to eat. These are some of the factors a retirement planner or financial adviser will help the individual sort through during the planning process.
“It’s a very individual situation,” Mathews says. “There’s a lot of specifics that can go into putting together a retirement plan or budget.”
For those who are approaching retirement age and haven’t thoughwt about saving, Bening says to start saving as much as possible, especially if the individual has raised his or her children and paid off the mortgage. At age 50, an individual can add another $5,500 — on top of the maximum of $17,500 that was allowed prior to age 50 — into a 401(k) account.
Overall, Bening says retirement planning needs to consist of saving money, investing money, protecting your loved ones and assets by having the appropriate insurance, and then considering whether you want to leave any sort of legacy for your children and grandchildren or to a charity.
“People want to leave their family in a better financial position than they were in when they first started out,” he says.