Young professionals and those just entering the marketplace are more often than not given the opportunity to begin investing in a retirement plan. Unfortunately, the idea of giving away part of one’s pay to what appears a faraway prospect causes some to opt out of their employer’s retirement plan, but a Wells Fargo Retirement Study has recently found that just a few years can make a significant difference in retirement saving.
When considering this concept, the study found that the “median savings of working Americans age 60 or older is $50,000, against a retirement savings goal of $300,000. Working Americans age 55-59 have saved three times as much as those age 60 or older, having amassed $150,000 toward a retirement savings goal of $500,000. The study also found that working Americans age 60 or older started saving for retirement at an average age of 37, whereas those ages 55-59 started saving at an average age of 31. This means that saving just a little bit sooner can make all the difference when one is ready to exit the workplace.
To give some perspective on these findings, Carolina Money spoke with Jean Ballentine, a certified financial planner and managing director of Investments for Wells Fargo in Columbia. Her first piece of advice? Start early and take advantage of employer retirement plans.
Starter Investors
“If you have a retirement plan at work, you should, as soon as possible, absolutely sign up for it and if possible, do as much as is being matched by your employer, if there is a match,” Ballentine advises starter investors. If there is no match, Ballentine suggests starting with what you can, a preliminary investment such as 1-2 percent, which one can make a goal to actively and incrementally add to each year.
The Wells Fargo study also found that consistent saving, no matter what the measure of one’s income, not only increases saving, but also increases optimism of standard of living after retirement. The study finds “The median retirement savings accrued by working Americans 40 years or older who have consistently saved is $160,000, compared to $60,000 saved by those who did not consistently save.” Further, “70% of working Americans 40 or older who are consistent savers believe they will have enough saved to live comfortably through their retirement years, as compared to 48% who are not consistent savers.”
Ballentine also stresses the importance of understanding debt.
“Pay down debt and do not take on additional debt you can’t afford,” she says. “Taking on debt or not paying off your debt now keeps you from being able to continue to save for retirement. I am finding, unfortunately, a lot of young investors with student debt, so I try to first have them make sure they sign up for the 401k because that will come out of their paycheck, and the second is to focus on paying off or paying down some debt, if they have it.”
Those with discretionary income are encouraged to consider a Roth IRA. For young people who are eligible, a Roth IRA is a “special retirement account where you pay taxes on money going into your account and then all future withdrawals are tax free,” according to RothIRA.com.
Those Who Are Older and Haven’t Yet Saved
Many Americans are able to work longer than they ever have before, due to changes in wellness and healthcare, so many assume they will be able to work longer and have more time to save before leaving the workforce. The Wells Fargo Retirement study found, “A third of working Americans age 55-59 say they ‘plan to save for retirement later in order to make up for not saving enough now, as compared to 21% of those who are 60 or older with those same plans.”
However, circumstances can prevent many from working as long as they planned. Though over half (54 percent) of the working 60-plus group said they intended to work until “at least 70” to save, almost half (49 percent) of those respondents ended up retiring early. Therefore, giving it more time is not always a financially sound solution.
Jean Ballentine again encourages workers to look at retirement plans. “I don’t care what age you are, if you have a retirement plan at work that you can voluntarily participate in, that is such a cornerstone of planning for any kind of retirement income. So even if [you’re] 50 and you want to retire at 60 and you haven’t started, it doesn’t help to just rub your hands.”
“I do try to make sure that everybody, first, takes advantage of whatever plan they have, and the other thing is…to get a draft out of your checking account for an investment program for retirement. That way, pay yourself first, as the saying goes.”
Ballentine’s other suggestion for those who are nearing retirement, or even just curious about living within their means during retirement, is to consider a “retirement bootcamp”. Essentially, before retirement, one looks at their finances to create a budget that they believe they can live within after Social Security. One then takes the amount decided upon and puts it into their checking account, leaving the rest of their monthly paycheck aside. This test can often be very revealing for potential retirees, especially those who think they don’t have to save.
“See how well you do on covering all of your bills and all of your expenses. A lot of people forget about the ancillary expenses: the vet bill, getting you hair done, Christmas presents, those kinds of things.”
Retirement Anxiety
The Wells Fargo study finds that there are high levels of retirement-related anxiety with “eight in ten (81%) workers 40 and older and seven in ten (70%) retirees saying that retirement in America is in a “crisis state.” Even workers who are consistent savers share this feeling, with three in four (76%) agreeing with this sentiment.”
Here are Jean’s tips for combatting retirement anxiety:
- Create a realistic budget
“Most people understand what goes in and comes out, but haven’t really sat down and done this,” Ballentine says. Take in to account of all yearly, monthly expenses and incomes to understand where your money is really going and coming in. - Continue Working (if you can)
Life expectancy has increased; some people are able to work longer. Though this should not be your savings plan, find a new job or working less hours at your current job, at your own pace, can help combat stagnancy and provide extra discretionary income - Be growth or goal-oriented and take more risks when you’re younger
Put money aside as early as possible and set a goal so you know how much you need to save. - Consider what you want your retirement day to look like
Not only are your finances changing, but your whole life is shifting as well. To combat anxiety, consider what sort of activities and daily lifestyle would bring you joy. - Understanding Healthcare
Waiting until 65 means retirees are eligible for Medicare and this helps with many healthcare costs. Obamacare gives retirees more options for healthcare. For example, though it sometimes can be expensive, it does eliminate fears of rejection for insurance, due to preexisting conditions.
Wells Fargo suggests many of Ballentine’s tips, including saving early, investing enough for your company to match, increasing how much you save, and also leaving your savings alone.
Benefits of Retiring in South Carolina
Ballentine notes, “We have a lower cost of living in many areas [of South Carolina]. It’s amazing to me what some of my clients who are not heavy spenders are able to save in retirement.”
In fact, Kiplinger finds that South Carolina is beneficial to retirees, in that it does not tax Social Security benefits and provides a retirement-income deduction for calculating state income tax, while income and property taxes are already low. So beyond the diverse landscape including mountains and beaches, the Palmetto State has even more benefits for retirees.
The idea of retirement can be a difficult one to grasp, no matter what the age. When one is young and entering the marketplace, the concept can seem abstract and removed, but as one grows older, the very word becomes somewhat daunting and even anxiety-producing. However with the right steps and financial choices, retirement can be the breeze it is meant to be. But savings are paramount to retirement success. Ballentine says, “You can’t afford not to do it.”