Retirement is the payoff at the end of a long career, the end
game most workers are striving for. But these days, with
corporate pensions disappearing (only 11% of Fortune 100
companies offered traditional defined-benefit plans in 2012, down
from 89% in 1985) and life spans on the rise (65-year-olds in
2010 had remaining life spans of 19.1 years, nearly two years
longer than folks who turned 65 in 1990), you're likely to be on
your own when it comes to building a nest egg that may have to
last 30 years or more.
save enough to retire comfortably? Many Americans aren't so sure.
In fact, 48% of workers don't expect to retire by age 65 -- up
from only 33% in 2005, according to a recent CBS News poll. And
22% of Americans don't think they'll retire until they're over
We talked with financial planners from the Financial Planning
Association about the common problems that trip people up on the
road to retirement. Here are 10 reasons you might never retire,
as well as the steps you can take to avoid these roadblocks.
When starting a new job, one of the first benefits to ask
about is the company retirement plan, such as a
, 403(b) for teachers and nurses, 457 plan for police officers
and other local-government workers, or the Thrift Savings Plan
for federal workers and military personnel. If your employer
doesn't have one -- or you just want to set aside more money --
you can save in an
. If you're self-employed, you have
, too, such as the solo 401(k). Regardless of the route you take,
saving in a retirement plan allows your money to grow free of tax
and compound more quickly.
"One of the easiest ways to accumulate wealth is to always
take advantage of tax-deductible and tax-deferred savings
vehicles," says Steve Doucette, a certified financial planner in
Sherborn, Mass. But although 64% of employees for private
employers have access to retirement plans, only 49% actually
participated in 2013, according to the Bureau of Labor
Statistics. Of those with no plan, 73% said their retirement
savings totaled less than $1,000, according to the Employee
Benefit Research Institute's 2014 Retirement Confidence
Many employers will match a certain amount of your savings in
company retirement plan
. If you don't contribute -- or don't contribute enough -- to the
plan to earn the match, that's additional compensation you're
throwing out the window. "It is a huge mistake if you do not find
a way to take advantage of an employer retirement-plan match,"
The average company contribution to retirement plans in 2012
was 4.5% of pay, according to an annual survey by the Plan
Sponsor Council of America. But about 34% of employers said that
more than half of their plan participants are not contributing
enough to take advantage of the full employer match, according to
a 2013 report by WorldatWork and the American Benefits
A company match is one of the few free lunches around. Don't
let it go to waste!
Don't overlook the role that time plays in compounding your
savings. "One of the biggest mistakes people make when planning
for retirement is underestimating the power of time," says
Michael Baker, a certified financial planner in Charlotte, N.C.
Starting to save early
, even with a smaller amount of money, can pay off. If, starting
at age 22, you stash $2,500 every year in a Roth IRA earning an
8% annual return, at age 62 you would have $699,453. If you wait
until 32 and save twice as much every year, at age 62 you would
have $611,729--about $88,000 less.
Now, imagine how much bigger the difference would be if you
were willing and able to increase that $2,500 annual stash from
year to year. "You don't invest your way to retirement security,
you have to save your way," says Daniel Galli, a certified
financial planner in Norwell, Mass. "This requires starting early
and increasing your savings each year."
While you can't change the past, there's no time like the
present to start saving.
loan from a company retirement plan
can be very costly. Sure, the interest you pay on the loan simply
goes to yourself. But as Melissa Brennan, a certified financial
planner in Dallas, says, the interest rate "is a much lower
return than [you] would have earned in the market." Plus,
if you end up not paying the money back
, your nest egg will suffer, and you'll have to pay taxes and
early-withdrawal penalties (unless you leave your job at age 55+)
on the distribution.
To avoid tapping your nest egg, work on
building up a separate emergency fund
that can be tapped when an unexpected expense comes up. An
emergency fund can also help keep you out of credit card debt.
The less money that goes to debt, the more that can go to
Thirty-five percent of all participants in 401(k) plans who
left their jobs in 2013 cashed out their balances, averaging
$16,000, according to an analysis by Fidelity Investments of
participants in Fidelity-sponsored plans. For young participants
age 20 to 39, that percentage is 41%.
Even if you have just a small amount in a company retirement
plan, cashing out when you switch jobs can be detrimental to your
nest egg in the long run. "It's as if the participant sees his
account as 'found money' instead of seed money for retirement,"
says Brennan. You're giving up years of compounded tax-deferred
growth, plus you have to pay tax and early-withdrawal penalties
(if you're younger than 55 in the year you leave your job) on the
entire distribution now.
The smarter move is to keep the money in a retirement plan.
three ways to do this
: Leave the money in your old company's 401(k), if you're allowed
to; roll the money over to an IRA; or roll the cash into your new
company's 401(k), if allowed. Whichever route you choose, keeping
the money in a tax shelter to grow for decades is a winning
These days, many employers will automatically enroll you in
the company retirement plan at a default contribution rate
(generally 3% of your pay). Some company plans offer "automatic
escalation," incrementally increasing your savings rate over
If you don't increase your savings rate well beyond the
default, you will have a
hard time building a sizable nest egg
Most experts say that workers need to save up to
15% of their annual pay
. The good news: That 15% includes any company match. So if your
company matches 4.5% of pay, that's only 10.5% a year that you
have to pony up.
All workers have annual limits on how much they can stash in
retirement accounts. For 2014, that's $17,500 a year for 401(k)s
and $5,500 a year for IRAs.
But starting at age 50, you get an opportunity to turbocharge
your retirement nest egg with higher contribution limits. And
that can help
late savers play catch-up
. For 2014, workers age 50 and older can put an extra $5,500 a
year in their 401(k) plan and an extra $1,000 in an IRA. Save
$23,000 in a 401(k) per year for 15 years starting at age 50,
and, at an annual rate of return of 8%, you'll have $674,459 at
age 65. That can go a long way toward shoring up your nest egg if
you didn't save much earlier in your career.
Use the Financial Industry Regulatory Authority's
401(k) Save the Max Calculator
to find out how much you have to stash away per pay period to
reach the maximum this year.
You may want to put some money toward college savings, but
don't shortchange your own future. "Funding 100% of your child's
college education before funding your retirement" is a common
mistake, says Jeff Nauta, a certified financial planner in
To help cover the costs of college, consider whether your
student might qualify
for need-based financial aid or merit-based
. Scholarships may help fill the gap, too. And consider college
affordability: Use our
College Finder tool
to sort through our list of the 300 best college values in the
U.S. Our rankings factor in financial aid packages and give extra
credit to schools that hold down student debt.
If you don't know how much you might spend, it will be hard to
know whether you
have saved enough
by the time you're eager to stop working. When you finally crunch
the numbers, you may discover a funding shortfall that requires
you to work longer than you had hoped.
As you approach retirement, consider
tracking your expenses for several months to a
year in advance
. Then factor in potential big-ticket items, such as a new roof
or a long trip, that you want to cover. "Many clients are shocked
to learn just how much they actually need to live on, and they
have not planned well for it," says Michael Lecours, a financial
planner in West Hartford, Conn.
For many people, once they hit age 62 and become eligible for
Social Security benefits, they take the money and run -- only to
discover that it's not enough to live on. After all, claiming at
62 means accepting 25% less in benefits -- for the rest of your
life -- than if you waited until age 66. (For folks born in 1955
and later, the take-it-at-62 cut will be even deeper.) So it's
back to work to make up the difference.
But waiting until at least full retirement age -- that's 66
for those born between 1943 and 1954 -- to claim Social Security
gets you 100% of your benefit, and waiting until age 70 scores
you an extra 32% a month, plus cost-of-living adjustments, for
the extra four-year wait.
can help stretch your nest egg to last your lifetime and can
provide the foundation for you to retire -- and stay retired.
Couples who want immediate income can delay
and make use of smart claiming strategies to generate a spousal
benefit. If you claimed early and now regret it, consider
four ways to boost benefits