How to Get Your Retirement Savings on Track
It doesn’t take much research to find articles, studies and warnings that American’s retirement savings are in rough shape. (See Most Older Americans Fall Short on Retirement Savings; The Typical American Has This Much in Retirement Savings; What Does the Average Person Have Saved for Their Retirement). Pre-retirees who find themselves behind in their savings, have to make every effort to step up their game because their most precious resource – time – is running out.
The question and challenge is how to increase your savings for retirement?
Here is a 5 step framework that can help you make the most of the years leading up to retirement. (Note: you can use and follow this framework with your financial planner.)
- Collect and record (document) your monthly expense history for the most recent 12 months. This step is not only critical, but mandatory.
Begin by collecting your historical records such as credit card statements and your check book. Then calculate how much you spent each month for every expense category (e.g. mortgage or rent, utilities, groceries, etc.). Next, classify your monthly expenses into discretionary and non-discretionary sub-totals. So for each month you will have two expense sub-totals: one contains your monthly expenses by category and the other sums your monthly expenses into discretionary and non-discretionary categories.
The reason that this step is mandatory is that you can not create, manage or control a budget without knowing your spending. For example, if you want to cut back an expense in order to increase your savings or pay off debt, you need to know what you’re spending and whether that expense is needed to live on (non-discretionary) or is something that you could live without (discretionary).
- Create a budget using your expense history as input. Note that the creating a budget is a process. It includes setting goals (including savings), decision making, prioritization, tradeoffs and sacrifice. Learning to use and to follow a budget is a discipline.
Your primary goal is to increase your savings. Simply stated you need to increase your income, pay off debt and reduce your expenses. How you go about this is up to you, your family and financial planner.
- Use a detailed retirement calculator (such as the one offered by Fidelity) to see how your finances stack up relative to your retirement needs. Your retirement plan enables you to see the cumulative effect of your money management and investments over a 20, 30 or even longer time frame.
In this step you are creating a plan (which is different than a budget) that will include all of your retirement years. Note that you can use your budget as input to help create your retirement plan.
Many people ask how much they’ll need in order to retire. I think the first question you need to ask is how much will my retirement cost? Developing a plan answers these questions in the correct sequence.
- If the results from the retirement calculator indicate that you are not on track to fund your retirement, you need to look for ways to get on track. Note that some of these tactics can be implemented and included in the budgeting process. For example,
- Increase your contributions to a 401k or Roth IRA.
- Maximize an employer 401k match.
- Take advantage of the over 50 401k and Roth IRA catch up provisions.
- Utilize, if available, any tax sheltered programs offered by your employer such as an HCSA or Employee Stock Purchase Plans.
- Look for ways to cut expenses.
- Pay down debt. This may be a more effective use of cash compared with today’s low yielding investments.
- Look for opportunities to generate more income and increase savings.
- Consider refinancing your mortgage given historically attractive rates.
- Consider creating a retirement plan scenario that factors in downsizing, relocating or working additional years.
- Develop a Social Security strategy that maximizes what you receive.
- Work with your financial planner to allocate your investments according to your age and risk tolerance.
- Monitor your budget and retirement plan. You should compare your actual expenses to your budget targets at least quarterly so you can make the necessary adjustments to stay on budget. And you should re-run your detailed retirement calculator at least once a year to see if you are getting your plan on track.
The beauty of this framework is that it covers what you can control today, helps you set goals and puts things into a long term context, i.e. the duration of your entire retirement.
For those of you who, like me, are DYI budgeters, you can check out my personal budgeting series to get more information. Here’s what topics are covered.
And for those of you who are not inclined to go it alone, you can use this framework for reference when you work with your financial planner.
Getting your retirement plan on track requires determination, basic financial literacy, hard work and commitment. Even if time is running out, it is still possible to improve your future retirement life.
Note: the information contained in this article is not offered as advice or guidance. Its purpose is illustrative – not instructive or prescriptive. As always, consider seeking professional advice when it comes to your financial decisions.