Saving for retirement? Checklist for late-starters: Things to do 15, 10 and 5 years from retirement

August 19, 2021
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Dubai: Many are still off to a late start when it comes to saving for retirement, multiple surveys in 2021 indicate. Since 2011, the annual percentage of global workers with less than $1,000 (Dh3,672) in savings and investments for retirement has increased from 26 per cent to 36 per cent.

These low savings levels are taking a toll on nest eggs. One estimate puts the ideal retirement savings for an individual at age 45 at $162,000 (Dh595,021) and calculates that, in reality, most are about $100,000 (Dh367,297) short of that goal by the time they reach age 45.

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How much do you really need to save for retirement?
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Let's review what late-starters should do to give their savings a necessary boost and learn some tips for those who are 15, 10, or five years away from retirement.

Checklist: What to do 15 years away from retirement?

Assuming that your target retirement age is 65, you're now 50 years old and are likely to be part of the Generation X (those born between 1965 and 1979/80 and is currently between 41-56 years old).

About half of members of Generation X have less than $10,000 (Dh36,729) in retirement savings globally, global research currently show.

Step #1: Extra contributions to “catch-up”

When people reach their 50s, it’s not uncommon for them to realise that retirement is no longer such a distant concept.

Starting at age 50, it’s a trend to now start making annual catch-up contributions on top of the regular retirement contribution limits to your qualifying retirement accounts.

If you’re in that age group and haven’t yet focused on that looming reality, it’s an ideal time to get serious about planning for your golden years.

Additionally, experts evaluate how individuals with at least 15 years of employment can start making additional contributions to their existing retirement plans on top of the regular payments.

This, they add, is because the 50s age-period is on average the point when you could be hitting your peak earning years, and because your expenses may have started declining if you’re empty nesters, as it has been the trend.

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If there’s a gap between what you’ve saved and what you need, you’ve probably got another 10 or 15 years to fill it. The idea, basically, is to determine what you want your level of lifestyle to be in the next chapter of your life, and then take the time to plot out how to get there.

This is also where the ‘catch-up’ rule that retirement plans offer will come of use.

Let’s say the contribution limit for your plans was $18,500 (Dh67,949) for 2018, workers age 50 and older can stash an extra $6,000 (Dh22,037) in their accounts under the so-called catch-up rule.

That’s a total of $24,500 (Dh89,987) you can put away. In some cases your employer may be in charge of your retirement plan. If that’s the case, ensure your company permits the catch-up contributions, matter experts opine, while adding that most do allow. This applies to all types of plans.

Step #2: Chase lower investment fees

When choosing funds for your retirement plan, you may think that there's little difference between a fund with an annual expense ratio of 0.16 per cent and another retirement fund with 0.25 per cent.

However, when you're 15 years away from retirement, those differences compound over time. A $30,000 (Dh110,189) investment would cost $48 (Dh176) per year on the first fund and $75 (Dh275.47) per year on the second retirement fund.

By investing in the fund with the higher annual expense ratio, and assuming that both funds have an annual return of 7 per cent, you would miss out on an extra $703.94 (Dh2,582) in retirement savings by the time you reach age 65.

Not to mention on the additional gains on those funds that you would have during your retirement years.

Several studies have shown that expense ratios are the only reliable predictor of future fund performance. For example, research from global rating agency Morningstar has found that low-cost funds consistently outperform high-cost funds.

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People look forward to living a life of comfort after retirement.
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Checklist: What to do 10 years away from retirement?

At this point, you're now 55 years old. About 33 per cent of the global population age 55 and over have no retirement savings and 26 per cent have retirement accounts with balances under $50,000 (Dh 183,648).

On top of taking advantage of catch-up contributions and chasing lower-cost funds, here are some additional steps to give your retirement strategy a much-needed boost.

Step #3: Time to revisit your retirement investment portfolio, if you haven’t

If you haven’t checked on exactly how your retirement savings is allocated among different investments, experts reiterate that now’s an important time to revisit your portfolio.

In your mid-50s, two things become more important: your risk tolerance – how well you stomach the value of your investments going up and down – and when you anticipate taking distributions from your portfolio.

If that’s going to happen in seven or 10 years, you might want to put some money in [safer investments] so you know you won’t have your money subject to any market volatility (sudden surge and drop in prices of your investment).

If you haven’t started saving yet you may have to tighten your purse strings and alter your post-retirement lifestyle, financial planners reiterate.

Thinking about your budget during your retirement years is a good idea so you can plan withdrawals from your retirement account, figure out your necessary contributions for the next decade, and figure out ways to rein in expenses.

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Retirement
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Step #4: Time to dial down your investment risk and pay down debt

Although desperate times often call for desperate measures, playing part-time stock trader with your retirement funds or allocating more moneys to investment vehicles promising higher returns (and more risk!) isn't a good idea.

Keep in mind that only 20 per cent to 25 per cent of actively managed funds beat their benchmark. Talk with your plan administrator about income investing, which focuses on picking financial vehicles that provide a steady stream of income.

While you may think that bonds are your only option, there many other securities to choose from. For example, there are stocks that consistently pay dividends.

If you have credit card debt, aim to get it paid during your mid-50s, financial planners add. The average interest rate on credit cards is pushing 17 per cent and is about to creep higher due to central banks now raising a key interest rate that affects various forms of consumer debt.

By comparison, the average rate on a 30-year fixed mortgage is about 4.7 per cent, and a five-year loan for a new car comes with an average interest rate of 4.75 per cent. In other words, credit card balances typically are far more expensive than other forms of debt.

Checklist: What to do 5 years away from retirement?

It's the final countdown to retirement age and now you're age 60. With an average retirement savings benchmark of $260,500 (about Dh1 million), about 74 per cent of the global workforce are behind on their retirement savings. Here are three additional planning steps.

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Step #5: Consider delaying your retirement benefit past your full retirement age

It's time to get the most accurate picture of your expected retirement benefit from your retirement account brokers.

To do this, you can use the retirement calculators, which are freely available online, that lets you estimate your retirement benefit by accessing your actual earnings record through a secure interface.

If you find that monthly benefit check to be too low, one way to boost is delaying your retirement benefit past your full retirement age.

Depending on the year that you were born, your full retirement age will fall somewhere between age 65 and 67.

For every year that you delay your retirement benefit past your full retirement age, average estimates show that you can get up to an 8 per cent increase on your total annual benefit.

This particular benefit increase no longer applies when you reach age 70, even if you continue to delay taking benefits, as that’s how most retirement plans work worldwide.

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Step #6: Consider delaying the required minimum distributions

Generally, holders of traditional retirement plans must start taking the required minimum distributions once they reach age 70.

What are the required minimum distributions?

Required minimum distributions, otherwise known as RMDs, generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year in which he or she retires.

However, there is one way to delay required minimum distributions. If you were to take a part-time job offering a retirement plan that allows you to rollover your old plan, then you can continue to contribute to the new plan and delay your first required minimum distributions until the year after you retire.

Before you attempt a rollover past your retirement, consult the plan administrator of your current retirement plan, the one from your potential new employer, and your financial planner, if you have one.

This is one of those times that may warrant hiring the right type of financial adviser to prevent any penalties.

Step #7: Consider retiring abroad to live better on a smaller budget

Last but not least, one way to further stretch your nest egg is to retire in a city abroad to live better on a smaller budget, have access to generous tax breaks. Several countries, including the UAE, Costa Rica, Panama, and Nicaragua, offer retirement programs.

Retirees are looking to experience another culture, studies show, and they want to broaden their horizons. Retiring abroad can also make your money go further.

Healthcare is another list-topper. There are many countries around the world that offer low- to no-cost healthcare to their residents, including Canada, Costa Rica, and Ecuador. In some cases, retirees utilise a mix of domestic and international private healthcare policies to meet their needs.