Retirement Planning In Your Fifties : a Case Study

Howard and Chrissie Jones both turned age 50 this year, and they’re looking ahead—and they’re concerned they haven’t saved an adequate amount for retirement.

It’s not that they’ve been financially careless. They both earn a decent living, jointly making $200,000 a year, and they have devotedly contributed to college savings plans that will pay for their children’s higher education. They just haven’t been able to save as much for the future as they would have liked. In other words, they’re in the same situation as many other people their age.

Howard and Chrissie have $100,000 in savings in a taxable account, and another $200,000 in tax-deferred retirement plans. They’d like to retire at age 65 (15 years from now). According to an online calculator, the couple would have to sock away $75,800 annually from now until retirement to be able to count on 80% of their current yearly income after they stop working, a typical goal for retirees. That’s an annual savings rate of 37.9%—a highly doubtful suggestion.

But there are a few ways the Joneses can perk up on that situation. If they continue to do most of their saving in tax-deferred accounts, such as 401(k) plans and IRAs, their money will go further, and their future Social Security benefits will also reduce the amount they have to save. For 2012, 401(k) participants can direct up to $17,000 of salary into their accounts ($22,500 for people over 50), and they can put an additional $5,000 ($6000 for people over 50) in an IRA (though at the Jones’ income level, their IRA contributions won’t be deductible).

For simplicity’s sake, assume that Howard and Chrissie remain in a 28% federal income tax bracket and a 6% state income tax bracket for the next 15 years. They’ve already saved $300,000 in their assorted accounts, and if together they contribute another $20,000 a year to their 401(k) plans until age 65, and they earn a hypothetical 5% rate annually on all of their investments, they will accumulate a total of $1.53 million (inflation-adjusted to $968,000 based on an annual 3% inflation rate).

In this case, the Joneses should to be able to do better than a $1.53 million nest egg. Presume they manage to double their annual 401(k) and IRA contributions to $40,000 a year. Assuming that same 5% annual interest rate on all investments, after 15 years, the Joneses will have amassed $1.96 million (inflation-adjusted to $1.24 million), making it possible for them to enjoy a more comfortable retirement.

(Customary Disclaimer: Of course, the returns cited here are for illustrative purposes only and are not indicative of any particular investment or strategy. Any investment includes inherent risks and there is no absolute protection against loss of principal in a declining market).

When it comes to your personal circumstances, there may be a number of ways to improve the odds of retiring comfortably.

You could make augmented regular contributions and “catch-up contributions” to your retirement plans. These are permissible for those who are age 50 or over. For 2012, they can defer an extra $5,500 for their 401(k), while IRA owners can kick in $1,000 more than the 2011 $5,000 limit. These figures are indexed annually for inflation and should continue to rise.

Re-examine your investment mix. There’s a tradeoff between risk and reward, and your portfolio should balance your need to preserve your savings with the possibility of attaining goals more quickly by adding investments that might achieve higher returns. Of course, this is generally not recommended if retirement is right around the corner.

Think about working a little longer. For example, the Joneses can’t receive their full Social Security benefits until age 67, and staying on the job those two extra years will allow them to save more; at the same time it decreases the number of years during which they’ll have to depend on retirement income. Even such a fairly small shift can make a key difference in a retirement scenario. More importantly, their Social Security benefits would not be reduced for life.

Everyone’s circumstances is unique, and coming up with a retirement plan that works for you may involve allowing for several alternative scenarios and mixing and matching a combination of factors—your saving rate, your investment strategy, your retirement needs, when you’ll leave the work force—to come up with a plan that works for you. We can provide expert guidance. A great place to start is our FREE On-line Road Map (Click HERE)