Truly Golden Years
Retirement Savings Need a Strategy
by Alacias Enger
A&U reader Henry is a fifty-three-year-old resident of Washington state. He works full time for a successful, local, family-owned business where he has a benefits package which includes a 401k, medical, dental, and vision insurance, which he uses in combination with a copay program for prescription coverage. Henry became debt-free in preparation for his home purchase five years ago and has remained so ever since. Additionally, Henry has successfully funded his emergency savings with a sum equal to five months’ worth of his basic expenses. All in all, Henry’s financial house is in order.
Henry primarily has one financial concern. Retirement. He has been saving 4% of his income in a traditional 401k offered by his employer, which also gets him a 4% company match, but he fears that it won’t nearly be enough. With retirement looming around the corner, Henry is terrified that his meager retirement savings and Social Security retirement benefit won’t even be enough to cover his mortgage payment, let along the rest of his living expenses.
Henry isn’t alone. According to a recent national survey that was commissioned as a joint effort between Get Rich Slowly and Experian, a staggering 71% of Americans say they don’t have enough retirement savings. This is a problem of epidemic proportions and is plaguing an entire generation for whom retirement age is just around the corner. So, what can someone like Henry do?
1. Aim to pay off the mortgage prior to retirement. For most people, housing payments are their single highest monthly expense. Eliminating this line item from his budget will do wonders for lowering the amount of income needed. Henry purchased his home five year ago on a thirty-year fixed and has been making the exact payment every month. If Henry continues on his current path, he will be seventy-eight years old before his home is paid in full.
Henry might consider comparing current mortgage rates with the one attached to his loan. If current rates are lower, and he plans to remain in the home for the foreseeable future, refinancing to a fifteen-year fixed could save him a good deal of money and put him on track to having a paid-off home by the age of sixty-eight.
Another strategy to consider, especially if his interest rate is lower than the current rates, is to simply pay extra onto the principal of his loan every month. Henry can easily use an online calculator to determine just how much he should pay to the principal of the loan monthly in order to pay it off by his intended retirement date.
2. Increase retirement contributions, and switch to a Roth 401k. Currently, Henry is contributing 4% to his traditional 401k, and getting a 4% company match. This is a terrific move because in doing so, Henry has avoided leaving free money on the table. However, he should be aiming to contribute at least 15% of his income to retirement accounts. Also, Henry’s company just started offering a Roth 401k. This presents a tremendous opportunity for Henry to save some serious money in the future. A Roth 401k, like a Roth IRA, uses after-tax dollars. This means that Henry will pay taxes on that money now, and let it grow tax-free until retirement. Once he hits retirement age, and starts taking the money out, he won’t owe taxes on it because he will have already paid them!
3. Delay taking Social Security retirement benefits. Social Security is in the process of increasing retirement age from age sixty-five to sixty-seven (for Henry, full retirement age is sixty-seven, based on his date of birth). Individuals may begin taking Social Security between ages sixty-two and seventy. The earlier you start, the lower your payment. Those who start taking this benefit before full retirement age, experience a reduced monthly payment to compensate for taking it early. In fact, this can be as much as 30% lower! If Henry needs to take it early, he should; however, if he can delay taking it, his payment will be increased by as much as 8% per year up to the age of seventy! Provided Henry’s employment and health remain steady, this could provide a substantial monthly increase!
Henry works incredibly hard to take care of his physical, mental, and financial well-being. In the past several years he has made incredible strides that have secured his financial position, and by employing a few key strategies, his retirement years will truly be golden.
Alacias Enger is a performing artist, writer, and educator. She lives with her partner in New York City, and is the founder of blogs “Sense with Cents” and “Travel Cents.” Follow her on Twitter @sense_w_cents.