40-plus? It's not too late to start saving

Published: Tuesday, 11 Feb 2014 | 8:00 AM ET

By: Shelly K. Schwartz, Special to CNBC.com

You're 40 and you wear it well. Career-wise you're right on track. You no longer seek others' approval. And you finally figured out how to get your kids to soccer practice and guitar lessons at 6 p.m. on Wednesday night—in two different towns.

Now, about that nest egg.

From a retirement-planning perspective, this is the decade where the rubber meets the road.
Those who started socking money away sooner are best positioned to meet their long-term goals, of course, but there's still plenty of time to shore up your savings if you've been hitting the snooze button on your 401(k) plan for the last 20 years.
"For a lot of people, their 40th birthday is when they start thinking about their financial future in earnest," said Gregory Olsen, a certified financial planner and partner with Lenox Advisors, noting 40-somethings often have the insight and maturity to project with greater accuracy their future income needs.

That figure, which differs for everyone, will depend on when you plan to retire, your projected life expectancy and whether you envision a low-budget retirement or one that includes trips to Europe and drinks at the club.

The Social Security Administration's life expectancy calculator offers general guidance on how long you may live, but you'll need to adjust the result to reflect your own health and family health risks.

When estimating your monthly expenses in retirement, factor in food, housing, transportation (car loan, gas and maintenance) and health care. (Remember, your home may be paid off by then and you'll no longer have to shell out for work-related expenses, but your health-care costs and travel budget will likely be higher.)

Next, determine how much, based on current projections, you'll be getting from guaranteed sources of income, including Social Security, trust funds (for the lucky few) and any pensions you may receive. Here again, you can estimate your future benefits on the Social Security Administration's website.


The difference between what you'll likely spend and how much you'll have in guaranteed income is the amount you need to save to maintain your standard of living, using tax-deferred retirement plans and taxable brokerage accounts.

Save up, stay healthy

Most financial planners recommend long-term savers sock 15 percent of their income away annually, maxing out tax-deferred 401(k)s and traditional IRAs first and then funneling extra savings into a Roth IRA.

A Roth IRA is funded with after-tax dollars, so you can't deduct your contributions. However, the earnings grow tax-free, and you won't need to begin a required minimum distribution at age 70½—or ever—allowing those dollars to continue generating compounded returns. That is one of the benefits of a Roth IRA vs. a standard IRA.

Married couples with a modified adjusted gross income of less than $181,000 can contribute the full $5,500 in 2014. Contribution limits kick in for those earning more.

However, if braces and car repairs make it hard to save as much as you should, don't panic, says Bob Adams, a certified financial planner with Armstrong Retirement Planning.
Simply direct new sources of income to your savings going forward and make a conscious decision to moderate your discretionary expenses starting today.
 

"If you should receive employment bonuses, stock option proceeds, inheritances or other unexpected money, think very seriously about applying it first toward your larger savings goals." -Bob Adams, certified financial planner, Armstrong Retirement Planning

"If you should receive employment bonuses, stock option proceeds, inheritances or other unexpected money, think very seriously about applying it first toward your larger savings goals and not a new car, new bathroom or European vacation," Adams said. "These one-time windfalls can significantly jump-start your savings program."

You can improve your financial prospects greatly, as well, by keeping yourself healthy, said Olsen at Lenox Advisors.

"If you can't save more today, you can at least minimize future expenses by taking better care of yourself," he said. "Lose weight, quit smoking and exercise often, because one of the biggest expenses in retirement is health-care costs."


Indeed, Fidelity Investments, which tracks retiree health-care costs, estimates that a 65-year-old couple retiring this year would need $240,000 to cover future medical costs—not including the cost of long-term care or any additional costs they might incur by opting for an early retirement before Medicare kicks in.
Expenses are higher still for those with chronic conditions like heart disease, diabetes and obesity.

Invest in yourself

During your 40s, don't forget to invest in yourself, said Matt Saneholtz, a certified financial planner and chartered financial analyst with Tobias Financial Advisors.

"Your highest income-earning years are usually still ahead of you into your 50s, so keep investing in your human capital," he said. "Keep learning, utilize your employer's training programs, take classes and stay on the cutting edge, because who knows what's going to happen with the job market."
One of the biggest pitfalls to retirement planning, he noted, is losing your job and being unemployed for a year or more—which not only impacts the amount you're able to save but may force your family to drain your retirement savings.

The other pitfall is being underinsured, Saneholtz said. If death or disaster strike, be sure your family—and your hard-earned nest egg—is protected with adequate health, life, auto and homeowner's coverage.

Other tips to ensure you don't outlive your savings down the road include maintaining an aggressive but diversified portfolio that consists of anywhere from 75 percent to 100 percent stocks, with any remaining percentage allocated to cash and bonds.
With a time horizon of 20 to 30 years before you retire, said Lenox Advisors' Olsen, you'll need that level of risk to grow your principal and offset the corrosive effects of inflation.
"Don't stress over how much you haven't saved," he said. "Get the facts in front of you, take your head out of the sand, and do the best you can with the time you have."

—By Shelly K. Schwartz, Special to CNBC.com

After 50, growing a nest egg gets easier

After 50, growing a nest egg gets easier

Published: Thursday, 20 Feb 2014 | 8:00 AM ET

 

By: Shelly K. Schwartz, Special to CNBC.com

Sharon Epperson and members of CNBC's Financial Advisors Council on how to turbo charge your savings in the years before retirement.

So you're 50. It's a lot better than you feared. It's better still if you're ready to get serious about your retirement savings.

Indeed, pre-retirees are often positioned to fund their nest eggs as never before.

Why? One or more of your kids may be out of the house, which frees up disposable income; your take-home pay may be at its peak; and you're now eligible to supersize your savings with higher tax-deferred contribution limits.
"There's a lot you can do in your 50s to build up that war chest," said Christopher Olsen, a certified financial planner with Ameriprise Platinum Financial Services.


The IRS allows those over age 50 to make additional catch-up contributions of $5,500 to their 401(k), 403(b), SARSEP or governmental 457(b), above and beyond the $17,500 annual limit for all taxpayers. Married couples who filed jointly and are both over age 50 may put a combined $11,000 extra into their accounts.

Those with a traditional IRA may contribute an extra $1,000 ($2,000 for married filers) beyond the standard $5,500 annual limit ($11,000 for married filers), but you may not be able to deduct all of your contribution if you also participate in a retirement plan at work.
Additionally, those with a SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account) or SIMPLE 401(k) plan may contribute an extra $2,500 per year. Married filers over age 50 may contribute an extra $5,000.

Courtney Keating | E+ | Getty Images

 

Higher tax bracket, bigger benefit

"If you're married and you and your spouse both make catch-up contributions to your 401(k)s or IRAs, you can save a good chunk of money," Olsen said.
For example, assuming you start catch-up contributions to your 401(k) at age 50, with an 8 percent annual rate of return, you would have amassed a savings of $667,661 by age 65. By comparison, if you make only the standard $17,500 contribution per year starting at age 50, you would have $508,003—about $160,000 less.

Another upside to being 50 and at the top of your earnings game is that your contributions to a tax-deferred account will likely benefit you more now than they did when you were 20, says certified financial planner Ken Waltzer, founder and president of Kenfield Capital Strategies.


"Many of my clients in their 50s are in the highest tax rate, which makes retirement saving even more attractive," he said, noting independent contractors and small-business owners can significantly reduce their taxable income.

Self-employed individuals and small-business owners over age 50, for example, who defer the maximum $57,500 per year to their Solo 401(k) ($17,500 in employee contributions, $5,500 for catch-up contributions, and $34,500 in employer contributions) can save $20,125 in federal taxes, he said.

Sidestepping landmines

When you reach your 50s, of course, there are plenty of financial landmines that could put a dent in your savings as well.

You may, for example, find yourself part of the "sandwich generation," providing often costly care to aging parents while still supporting your children.
A recent MetLife study found the proportion of adult children providing personal care and/or financial assistance to a parent has more than tripled over the past 15 years, with a quarter of adult children, mainly baby boomers, providing care to a parent.


For those age 50 and older who leave the labor force early to care for an aging parent, the cost of providing that care averages $303,880 when you factor in lost wages, lost Social Security benefits and the negative impact on pensions, according to the study.
That's some serious coin.

Thus, it's important to talk openly with your parents about their financial position and plans for the future, said Matthew Saneholtz, a certified financial planner with Tobias Financial Advisors.

"You don't want to put too much weight in any inheritance you expect to receive. Anything can happen." -Matthew Saneholtz, certified financial planner, Tobias Financial Advisors

"Be sure your parents have an estate plan in place and long-term care coverage, or at least a picture of their final stages of life, because it might affect you," he said. "If you know your parents don't have the money to pay for care on their own, are you willing to use your own savings to help them? Will they rely on Medicaid? Will you take care of them in your own home? These are questions you need to think about, as they could become your dependents."
On the other end of the spectrum, a frank financial discussion with your parents is equally important if you expect to receive an inheritance, Saneholtz said.


They may share details about the estate they plan to leave behind, including gifts to charity, which will impact you. Just be sure you continue to save for yourself.
"You don't want to put too much weight in any inheritance you expect to receive," Saneholtz said. "Anything can happen. There are so many different variables, and documents can be changed at the last minute."