Retire Better: How much you need to retire, a fatter 401(k), and why Social Security is more important than ever

Personal Finance


Contribution limits upped for IRA, 401 (k) plans

Here’s a nice Christmas present from the Internal Revenue Service: For the first time in six years, it will allow you to stuff more cash into your individual retirement account (IRA). Beginning next year, that limit will rise to $6,000, from the current $5,500. Meantime, workers can also put $19,000 in 401(k), 403(b), and most 457 plans—up from $18,500. One thing that remains unchanged affects federal workers: the contribution limit for Uncle Sam’s Thrift Savings Plan remains unchanged at $6,000.

Life expectancy falls again

It seems like I’m always seeing stories in the paper about someone celebrating a 100th birthday. Good for them. Especially when they say their secret to longevity is something like downing a shot of bourbon every night and smoking a fine cigar.

And yet, as we plan for old age, did you know that life expectancy in the United States has actually been falling since 2014? The average American could expect to live to 78.9 that year, says the National Center for Health Statistics, a U.S. government agency. In 2015 it fell to 78.7 and last year slipped to 78.6. For a nation that likes to call itself “exceptional,” it’s worth noting that people in 28 countries now live longer the average American, according to the Organization for Economic Cooperation and Development.

Behind the fall: sharp increases in deaths from opioids and suicides; Influenza, pneumonia and diabetes are also factors. Some 100 million Americans—100 million—are either prediabetic or have full-blown diabetes itself.

What does this have to do with your retirement, you ask? Because huge problems like these are helping to push up overall health care costs for all Americans. Fidelity, the Boston-based asset-management firm, estimates that the average retired couple age 65 may now need approximately $280,000—in after-tax dollars, no less—to cover they own health care expenses. Government budgets are also being pressured at the federal, state and local level as the cost of responding to these problems mounts. This in turn could mean, at some point, reduced government services or higher taxes in the years ahead.

How much is enough?

Got $610,000 lying around? Americans say that’s how much, on average, is needed to retire, according to a survey by senior living provider Provision Living.

Is this really enough? Given the general rule that you should be able to take out 4% of your portfolio each year; 4% of $610,000 is $24,400. Tack on Social Security and where you live (some states are friendlier tax-wise to retirees than others), and it could be enough to get by, albeit modestly.

But the problem, and we keep mentioning this: most folks don’t have anywhere near $610,000 to begin with. According to a separate study by the Transamerica Center for Retirement Studies, the median amount of retirement savings for someone in their 60s is $172,000 (median means that half have more than this, and half have less). And that’s before debt—mortgages, car loans, credit cards, student loans—yes, many Americans approaching retirement are still paying off student loans. The average person aged 66-74 still has an average $66,000 in debt. All of this, of course, eats into the ability to finance a decent retirement.

Social Security: More important than ever

You know how a financially healthy retirement has been compared with a three-legged stool, right? One leg is your pension, and one is your personal savings. But as pensions continue to fade away, and most Americans haven’t saved enough on their own, that third leg—Social Security—assumes even more importance than it’s supposed to.

Which is why 69% of baby boomers (those born between 1946 and 1964) expect Social Security to be a “major” source of retirement income while just 28% are counting on some kind of pension, according to a recent report from the Washington-based Insurance Retirement Institute (IRI).

There’s a Catch-22 here. If you really need the money, the temptation to grab Social Security as soon as you can—at age 62—is great. The problem is taking it early means getting less each month, albeit for a longer period of time. The Social Security Administration (SSA) says 36.9% of woman and 31.9% of men do just that—more than any other age. This is undoubtedly a reflection of the fact that those other two legs of the stool—pensions and personal savings—are so wobbly.

But it’s important to remember that if you wait until full retirement age—either 66 or 67—you’ll get more each month, and if you delay until age 70, a lot more. Everyone’s situation is different, of course, but generally speaking, most financial advisers would tell you to delay Social Security for as long as you can. Hardly anyone does this, though: Just 4.6% of women and 2.9% of men in 2016, according to the SSA.

Boost your retirement portfolio by doing this

You know the portfolio statements you get in the mail or online? If you’re like most folks you probably look at the big numbers to see how you’re doing overall and how your funds or individual holdings are doing—and that’s about it.

But by not looking at the fine print in your statements, you could be leaving money on the table. You may want to see how much you’re paying in fees for things like mutual funds and exchange-traded funds (ETFs). Like drops from a leaky faucet, it may not seem like much, but over time it can add up. Remember: Minimizing fees and taxes boosts your overall return.

For example, some mutual funds continue to charge “loads”—upfront sales fees—that cut into your returns. To give one example, the American Funds has a good reputation for solid money management and a serious, laserlike focus on providing long-term returns for their investors. But they also charge, in some cases, fees as high as 5.75%. That means if you make an initial investment of, say, $10,000 with them, you’re only putting $9,425 to work (disclosure: I worked at that company many years ago).

The competition for your dollars means that industry fees have been dropping overall: A study by Morningstar notes that average fees fell by 8% last year—the biggest decline on record. The advice here: Check to see what you’re paying for things like “expense ratios,” which are annual fees charged by all mutual funds, index funds and exchange-traded funds. You pay these fees regardless of whether they’re in your 401(k), individual retirement account or brokerage account. Also check to see what you pay own commissions to trade in and out of your investments and whether you can do better somewhere else.

Paul Brandus is the White House bureau chief for West Wing Reports. You can follow him on Twitter WestWingReport.

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