7 Retirement Planning Steps Late Starters Must Make


Most Americans aren't saving enough for retirement — and worse, many are off to a late start. Since 2011, the annual percentage of U.S. workers with less than $1,000 in savings and investments for retirement has ranged from 26% to 36%.

These low savings levels are taking a toll on nest eggs. One estimate puts the ideal retirement savings for an individual at age 45 at $162,000 and calculates that, in reality, most Americans are about $100,000 short of that goal by the time they reach age 45. Let's review what late-starters should do to give their savings a necessary boost and learn some tips for those who are 15, 10, or five years away from retirement.

15 Years Away From Retirement

Assuming that your target retirement age is 65, you're now 50 years old and are likely to be part of the Generation X. About half of members of Generation X have less than $10,000 in retirement savings.

Step 1: Take Advantage of Catch-Up Contributions

Starting at age 50, you're now legally allowed to start making annual catch-up contributions on top of the regular contribution limits to your qualifying retirement accounts. In 2016, individuals age 50 and over could contribute an extra:

  • $6,000 on top of the $18,000 limit to 401K (other than a SIMPLE 401K), 403b, SARSEP, and governmental 457b plans;
  • $3,000 in catch-up contributions to SIMPLE IRA or SIMPLE 401K plans; and
  • $1,000 on top of the $5,500 limit to traditional or Roth IRAs.

Additionally, individuals with at least 15 years of employment can make additional contributions to their 403b plans on top of the regular $6,000 in catch-up contributions. For more details, review the IRS rules for 403b contribution limits.

Step 2: Chase Lower Investment Fees

When choosing funds for your 401K, you may think that there's little difference between a fund with an annual expense ratio of 0.16% and a fund with one of 0.25%. However, when you're 15 years away from retirement, those differences compound over time. A $30,000 investment would cost $48 per year on the first fund and $75 per year on the second fund.

By investing in the fund with the higher annual expense ratio, and assuming that both funds have an annual return of 7%, you would miss out on an extra $703.94 in retirement savings by the time you reach age 65. Not to mention on the additional gains on those moneys that you would have during your retirement years.

Several studies have shown that expense ratios are the only reliable predictor of future fund performance. For example, research from rating agency Morningstar has found that low-cost funds consistently outperform high-cost funds.

10 Years Away From Retirement

At this point, you're now 55 years old and you're supposed to be wiser. Still, about 33% of Americans age 55 and over have no retirement savings and 26% have retirement accounts with balances under $50,000. On top of taking advantage of catch-up contributions and chasing lower-cost funds, here are some additional steps to give your retirement strategy a much-needed boost.

Step 3: Consider Cities Where You Can Retire on Just Social Security

It can be a humbling experience to have to tighten your belt after having worked so hard for many decades. If you're going to become part of the 62% of U.S. retirees that expect Social Security to be a major source of income during retirement, start investigating what U.S. cities are better suited to live on your expected check from the Social Security Administration (SSA).

Here are three list of cities to start your search:

Thinking about your budget during your retirement years is a good idea so you can plan withdrawals from your retirement account, figure out your necessary contributions for the next decade, and figure out ways to rein in expenses.

Step 4: Dial Down Your Investment Risk

Desperate times often call for desperate measures. However, playing part-time stock trader with your retirement funds or allocating more moneys to investment vehicles promising higher returns — and more risk! — isn't a good idea. Remember that only 20% to 25% of actively managed funds beat their benchmark.

Talk with your plan administrator about income investing, which focuses on picking financial vehicles that provide a steady stream of income. While you may think that bonds are your only option, there many other securities to choose from. For example, there are stocks that consistently pay dividends.

5 Years Away From Retirement

It's the final countdown to retirement age and now you're age 60. With a retirement savings benchmark of $260,494, about 74% of Americans are behind on their retirement savings. Here are three additional planning steps.

Step 5: Accumulate Delayed Retirement Credits

It's time to get the most accurate picture of your expected retirement benefit from the SSA. To do this, you can use the Social Security Detailed Calculator, which lets you estimate your retirement benefit by accessing your actual earnings record through a secure interface. If you find that monthly benefit check to be too low, one way to boost is delaying your SSA benefit past your full retirement age.

Depending on the year that you were born, your full retirement age will fall somewhere between age 65 and 67. For every year that you delay your retirement benefit past your full retirement age, you can get up to an 8% increase on your total annual benefit. The benefit increase no longer applies when you reach age 70, even if you continue to delay taking benefits.

Step 6: Delay Required Minimum Distributions

Generally, holders of traditional and Roth 401K plans must start taking required minimum distributions (RMDs) once they reach age 70-1/2. 

However, there is one way to delay RMDs. If you were to take a part-time job offering a retirement plan that allows you to rollover your old 401K plan, then you can continue to contribute to the new plan and delay your first RMD until April 1st of the year after you retire.

Keep in mind that:

  • Your old traditional 401K must go into a new 401K;
  • Your old Roth 401K must go into a new Roth IRA;
  • Your new plan must accept rollovers; and
  • You can't hold more than 5% of the company sponsoring the old plan to be able to do a rollover past age 70-1/2.

Before you attempt a rollover past age 70-1/2, consult the plan administrator of your current retirement plan, the one from your potential new employer, and your tax accountant or financial planner, if you have one. This is one of those times that may warrant hiring the right type of financial adviser to prevent any tax penalties.

Step 7: Consider Retiring Abroad

Last but not least, one way to further stretch your nest egg is to retire in a city abroad to live better on a smaller budget, have access to generous tax breaks, and enjoy beautiful locales and ideal weather conditions.

Several countries, including Costa Rica, Panama, and Nicaragua, offer retirement programs that provide U.S. retirees several benefits and require a minimum monthly SSA benefit ranging from $600 to $1,000 to qualify. (See also: 4 Exciting World Cities You Can Afford to Retire In)

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