Baby boomers are starting to enter their retirement years at record pace.
More than 10,000 boomers will turn 65 every day for the next 19 years, but not all of them will be retiring at 65. There are nearly 200,000 baby boomers in Mecklenburg County and, statistically, about half are not financially ready to retire.
In order to sustain the same quality of life during retirement, it is recommended that approximately 70 to 80 percent of preretirement income is saved for each year you anticipate being retired. For the boomers here in Mecklenburg County who are underprepared for retirement, they will need to boost their retirement savings strategies immediately and plan now to make the most out of their retirement savings in the future.
Retirement savings deficit is a nationwide problem that has worsened with the economic crisis. In 2010, according to the Employee Benefit Research Institute, the U.S. recorded an estimated $4.6 trillion in retirement inadequacy, which equates to about $48,000 per person. If Social Security were eliminated, those numbers nearly double to $8.5 trillion, or $89,000 per person, in a retirement income deficit.
However, a large number of soon-to-be retirees are relying on the federal entitlement program, Social Security, to fund their golden years. The truth is that Social Security is facing financial challenges of its own.
This past year the program ran at a deficit as well, one that may rebound temporarily but is expected to return until the program runs out of money completely. While the program will continue to pay benefits, it is forecast that the funds will be exhausted by year 2037. The problem with Social Security is it’s become a crutch for too many people. Social Security was never intended to be the sole or dominate source of income during retirement. It is your responsibility to make sure enough money is saved to afford retirement.
That said, to avoid future financial crisis, you need to save more now and make the most out of what you have saved already. Planning and saving for retirement can be confusing, and at times discouraging, but you cannot allow uncertainty to deter your investment potential. Without age-appropriate investment strategies, you could be costing yourself a lot of money, which is why it is critical to apply only those investment strategies that align with your financial goals.
One way to determine what percentage of investments should be invested aggressively is by applying the Rule of 100. The Rule of 100 suggests that the difference left after you have subtracted your age from 100 represents the percentage of investments that could be aggressively invested. As you age, allocate your assets less aggressively so as to save money and protect yourself against a volatile market. Invest conservatively and place more savings in guaranteed accounts. This will help to protect your quality of life in retirement, too.
When evaluating retirement savings, factor inflation into your retirement income plan. Inflation is often overlooked and can drastically change the value of your savings in the future if not considered. The price of most consumer products generally increases by an average of 3 percent per year and, therefore, so should the value of your savings. To help offset inflation, make sure all of your savings and investments are increasing in value by at least 3 percent each year. Doing so will help protect the value of your savings as well as help prevent you from paying for the money you have worked hard to save.
Currently, the Bush tax cuts are still in effect, which means your tax savings could be significant if assets are properly allocated. Consider creating or converting some of your savings to a Roth IRA. A Roth IRA allows you to grow and withdraw your money tax-free. Because taxes are paid on the contribution, you get to lock in today’s (relatively low) tax rates as opposed to other retirement savings vehicles that would require you to pay taxes on the withdrawal when tax rates are unknown but will more than likely be higher. A Roth IRA could potentially save you a significant amount of money during retirement.
Retirement saving requires time and planning, usually for a number of years prior to retirement. But as many baby boomers are entering retirement and finding their savings not sufficient to maintain their quality of life during retirement, additional strategies need to be implemented. Be assertive with your money and investments and make sure each strategy aligns with your financial goals for the future. Retirement can be a huge expense, so it’s important to make the most of your savings.
Bryan Philpott is a registered financial consultant and Todd Witt is a financial adviser, both for Aspire Wealth Management, a financial-advisory firm headquartered in Cornelius.