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3 Steps to Make the Most of Your Peak Earning Years

Samantha Eckhardt,

June 10, 2014

Retiring Your Way


... nearly a third of Americans age 55 and older have saved less than $10,000 for retirement ... only 22% have saved $250,000 or more

All our lives we work, work, work and hope to retire someday. Unfortunately, for many retirement is a far-off goal that we decide we will worry about some other day. Well guess what! Now is the time to get serious! No matter what you have done so far to “plan” for retirement, these last 10-15 years are crucial—especially if you haven’t saved enough. This is true for most people; nearly a third of Americans age 55 and older have saved less than $10,000 for retirement, according to the Employee Benefit Research Institute. Only 22% have saved $250,000 or more.

Fortunately for most, these last years are your prime earning years and many of your major expenses are behind you. Typically, the last 10-15 years before retirement are when clients are able to save the most. If you have never tried to calculate what you will need in retirement, do it now. That savings goals is a destination on your financial map, giving you direction as you save, invest and create your overall financial plan. Maybe you had a retirement savings goal at some point? Now is the time to dust it off and make sure it’s still realistic. To make sure you are on track, don’t hesitate to seek help from a financial planner or use resources available on the internet such as our own 50s & 60s: Pre-Retirement Checklist. Here are 3 Steps to make the best of your last working years.

1. Determine Your Cost of Retirement

What do you want your retirement to look like? Do you plan to travel the world or buy a vacation home in Arizona? Or maybe you plan to spend more time with your grandchildren? All of these goals are great, but will require different amounts of money. The first step is to write these goals down. What if you don’t know what you want your retirement to look like? At least write down the age you hope to be able to retire. This will give you a time horizon to work with.

Next you will need to figure out how much you will need to retire based on your goals. The most important factor to consider when coming up with this number is to know how much you will spend on an annual basis. I know what you’re thinking, “I have no clue how much I will spend on an annual basis in 15 years”. Well do you know how much you spend annually now? If not, figure it out. Then decide if you plan to spend more or less than that amount in retirement. Maybe you have a mortgage payment now, but it will be paid off by the time you retire. Subtract that payment, or maybe you will then use those dollars to travel. To be conservative you could use the same number you spend today for your retirement calculations. A rule of thumb would be to aim to replace 70-80% of your pre-retirement income during retirement. Regardless, make sure to figure in inflation. The average annual inflation rate over the last 100 years is 3.22%. So if you spend $50,000 in 2014, that number will be $80,432 in 15 years. You can use this budgeting worksheet to get you started.

Now you need to consider how much you have saved so far and what you can expect for income in retirement. Income for most will be social security; however, some may have other income sources in retirement such as rental income or if you’re lucky, a pension fund. These income sources will help offset your retirement costs. Once your available income sources have been applied to your retirement costs, you will be able to take withdrawals against your portfolio assets to make up the difference. With this information you want to look at your withdrawal rate. A key to making sure your retirement assets last a long time is to make sure that you are conservative with the amount of assets you withdraw each year. A good plan is to withdraw no more than 3-5% of your assets on an annual basis.

2. Take Advantage of Catch-Up Contributions

Now you know the income you expect to have, what you’ve saved so far and what you will need to save. Are you saving enough to reach your goals? If you are age 50 or older, you are now eligible to contribute thousands more than your younger colleagues. In 2014, you can contribute an additional $5,500 to your 401(k) over the annual limit of $17,500 for a total of $23,000. Yes, $23,000 is a LOT to take from your take home pay. If you are nowhere near that amount right now try increasing it by 1-2% as often as your employer will let you. Often times you are able to change your contribution amount quarterly, semi-annually or annually.

You are also eligible to make a $1,000 catch-up contribution to a Roth IRA; for a total maximum contribution of $6,500 in 2014. Unlike a traditional IRA or 401(k), you don’t have to take annual required minimum distributions from a Roth IRA once you turn 70 ½. Therefore, these dollars will have longer to grow tax-free. There are, however, income restrictions on a Roth IRA. You’re eligible to contribute the full amount if your modified adjusted gross income is less than $181,000 if you’re married filing jointly or less than $114,000 if you’re single or head of household.

3. Know Your Asset Allocation

Now that you know how much you will need in retirement and how much you need to save between now and then, do you know how your current investments are allocated? Do you know how much you have in equities versus fixed income? It is important to know how your dollars are allocated because you want to make sure it is appropriate for your time horizon. The most common asset categories are:

  • Stocks
  • Bonds
  • Cash

By including different asset categories an investor can protect against significant losses. Historically, the returns of the three major asset categories have not moved up and down at the same time. Market conditions that cause one asset to do well often cause another asset category to have average or poor returns. In addition, asset allocation is important because it has major impact on whether you will meet your financial goal. If you don’t include enough risk in your portfolio, your investments might not earn what you need to reach your goal. On the other hand, if you take too much risk your money might not be there when you need it. When looking at your asset allocation it is important to look at ALL of your investments including; brokerage accounts, money market accounts, 401(k)s, 403(b)s, IRAs, Annuities, etc. We have a free Investor Risk Tolerance Questionnaire you can use.


Now get to work! If your head is spinning have no fear because we are here to help. Union Bank has comprehensive financial planning and portfolio analysis available. For more information please contact me, Samantha Eckhardt.

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This blog article is for informational purposes only, and is not an advertisement for a product or service. The accuracy and completeness is not guaranteed and does not constitute legal or tax advice. Please consult with your own tax, legal, and financial advisors.