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Don’t procrastinate when it comes to retirement

 

By Barbara Magor Deel

The approach of retirement sometimes sneaks up on you. For many reasons, some people may not begin saving seriously for retirement until they hit age 50. According to a study from Employee Benefit Research Institute, more than a third of people 55 and older have saved less than $10,000 for retirement!

Making savings a high priority can result in a considerably different outlook for your golden years -- if you were to take advantage of your 401(k) at work and save $23,000 for the next 15 years until you are 65 -- at a 6 percent rate of return that money can grow to approximately $570,000. Considering that a third of American’s Social Security is their only source of income, you would be way ahead of the game.

If you keep in mind that we are also living longer and a lot of our money will be going to health care, consider savings to a health savings account. Do not assume Medicare will cover all your medical expenses since the premium is deducted from your Social Security benefits and only covers about 60 percent of your health-care costs.

There are a few “perks” to being over 50 when it comes to tax-advantaged savings. The maximum you can contribute to your IRA each year of your earned income is $5,500 plus an additional $1,000 for those over age 50. The maximum contribution for a 401(k) account is $17,500 plus an additional $5,500 in catch-up contributions totaling $23,000 plus any additional employer matching amounts that your company deposits on your behalf. Of course, you should double check with your accountant, but postponing your retirement and continuing to work and contribute will add to your nest egg along with managing and curbing expenses.

Individual Retirement Accounts are getting larger according to a recent study by Reuters; however, investors are leaving “returns on the table” due to procrastination. IRA savers can make contributions anytime from Jan. 1 of a tax year up until the tax filing deadline the following April. Fidelity Investments reports that for the 2013 tax year, 70 percent of total IRA contributions came in during tax season. Losing out a full year’s worth of tax-advantaged compounded growth gets expensive over a lifetime of saving.

Assuming an investor contributes the maximum $5,500 annually for 30 years ($6,500 for those over age 50) and earns 4 percent after inflation, procrastinators will wind up with account balances $15,500 lower than someone who contributes as early as possible in a tax year. But for many last-minute savers, even more money is left on the table -- since among savers who made those last-minute contributions for the 2013 tax year just ahead of the tax filing deadline, 21 percent of those contributions went into money market funds since they were not prepared to make investing decisions.

When Vanguard looked at those hasty money market contributions for the 2012 tax year, two-thirds of those funds were still sitting in money market funds four months later! Missing the best days of market performance can drag down the value of your portfolio over the long term.

For helpful tips regarding retirement at any age, please feel free to email your questions to barbara@americaninvestmentplanners.com.

Barbara Magor Deel is a certified financial planner and a chartered financial consultant with EFS Generation Income Planning in La Vernia.

 
 
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