1. Reassess life priorities.
Part of reassessing priorities is ensuring you have a plan in place. People should have a retirement plan when they are significantly younger than 50, yet EBRI finds that only 42% of workers of all ages have a retirement plan.
If, at the age of 50, people find themselves inadequately prepared for their dream retirement, they should start by looking at the future, advises Setzfand. “The first thing people should do is consider, ‘What do I want to do with the rest of my life?’” The answer to that question will help decide what actions need to be taken, Setzfand explains. Before moving forward, it is important to ask such questions as “Do I really need that second house in Florida?” or “Can I [afford to] start a trust fund for my grandkids?”
People need to consider how much they are willing and able to fund their children’s college education. Setzfand notes that many parents in their 50s will foot most or all of their children’s college bill to make sure their children don’t end up with debt early in life. However, she cautions people to be careful to make sure they have enough money to build and sustain their own retirement nest egg. After all, you can’t borrow to fund your golden years.
2. Take advantage of increased contribution limits.
If you are late saving for retirement, you may need an extra boost to get closer to your goals. Once people reach age 50, the amount of money they can contribute annually to their 401k and their IRA increases from $17,000 to $22,500 and from $5,000 to $6,000, respectively. Employees should take advantage of these higher contribution limits if possible, since contributions to these plans are tax deductible.
Plus, many employers match contributions up to a certain amount, meaning that employees are forgoing free money if they do not contribute the maximum contribution amount. “If you have access to a 401k, jump into it with two feet,” Ready says.
Advisers also recommend downsizing. While the level of downsizing for some could mean simply cutting down on small expenses such as eating out and shopping, for others, more drastic measures may be necessary.
“Downsizing often isn’t something that can be done on the peripheral,” Demmissie says. For some, it may even mean downsizing the house, especially if there is a lot of equity on the property.
Those eyeing retirement can even plan to move in with their adult children. Demmissie notes there has been an increase in multiple generations living under one roof. While living with children is not necessarily part of most people’s dream retirement, it can help make sure retirees do not outlive their money by cutting out housing costs and even some home-care costs. Moving to places with lower tax rates and costs of living, Demmissie notes, may also help people live their more ideal retirement at a lower cost.
4. Keep working.
With people living longer than generations past, the traditional retirement age of 65 is generally increasing and will continue to do so. About 40% of current American employees plan to continue working until at least age 70, according to a 2011 study by the Transamerica Center for Retirement Studies.
Working until a later age, whether full-time or part-time, gives people more time to build their nest egg while also reducing the likelihood that they will run out of money during their golden years. Plus, if someone truly enjoys his or her job, continuing to work in some capacity is not necessarily a bad thing. “I always believed retirement was fictional,” says John Sestina, founder of John E. Sestina and Company in Columbus, Ohio. “Why does someone have to quit working if they are productive, and what are they going to do to replace that in their life? You can only play so many rounds of golf.”
People still need to take into consideration that their employment status could change due to circumstances such as a layoff or deteriorating health, says George Middleton, an adviser with Limoges Investment Management in Portland, Ore. “A lot of my clients say they will just keep working,” he says. “I always tell them ‘but what if you can’t?’”
5. Factor in health care costs.
Another burden facing retirees in the relatively near future is rapidly growing health care costs. A 65-year old couple who retires in 2012 should plan for $240,000 for medical costs, according to a study by Fidelity, provided the couple does not receive employer-sponsored health coverage. This figure, on average, has risen 6% annually since 2002.
Diane Pearson, a financial adviser at Legend Financial Advisors in Pittsburgh, says higher health care costs in recent years have changed the way she has counseled clients on retirement. She used to try to get her clients’ nest eggs to accrue 2% more than inflation each year, but now that number is close to 6% due to rising health costs.
“People generally underestimate the amount of money they’ll need in retirement,” Pearson says, noting that health care predictions play a major role in that underestimation. “The rule of thumb has been spending 75% to 85% in retirement of what you were spending while you were working full-time. I think that’s absolutely false.” Pearson says the amount spent in retirement likely will be about the same spent in your working years.