We’ve got bad news and good news. The bad news is most Americans aren’t even close to planning for retirement. A recent study showed that up to 36% of all Americans don’t even have $1,000 saved for retirement. In short, their savings wouldn’t pay for a month’s worth of expenses. Ideally but not practically, the average 45 year old should have about $160,000 in their nest egg. But who realistically does? The good news is that you can turn that around, even if you are late to the game. Just follow our retirement bookkeeping tips to make the most of the time you have left. They’re good for everyone from 5 to 15 years away from retirement.
1. Retirement Bookkeeping Catchup
Those who are around age 50 may be planning to retire at age 65. However, with only about half of people in this age group having over $10,000 in their retirement account, it can be a challenge. But at age 50, there are what are called catch up contributions. These individuals are allowed to start contributing yearly amounts in addition to the regular contribution limits on any and all qualifying retirement accounts. This includes:
- An extra $1,000 in addition to the $5,000 limit to a traditional or Roth IRA.
- An extra $3,000 in catch up contributions to a simple 401(k) or simple IRA.
- An extra $6,000 in addition to the $18,000 limit to 401K (not including a simple 401 plan), SARSEP, and governmental 457b plans.
- An extra $3,000 to 403(b) plans if the employee has been there for over 15 years. There are also rules to allow for $5,000 and $15,000. Learn more by going to the IRS site on 403(b) plans.
2. Better Investment Ratios
Why rollover a 401(k) or open a new one all together? For a lower annual expense ratio. Initially, there may be not much difference to the untrained eye between a plan with an annual expense ratio of 0.15% and one that offers 0.25%. But those who are 15 years away from retiring can see a big difference. Assuming a return of 7% and retirement of $30,000, those with the higher ratio will see about $700 disappear on the more expensive fund.
3. Minimize Risk in Investments
Yes, the stock market is a young person’s game. This is true mostly because they have time to make up a bad investment or ten. Those closer to retirement age may be tempted to diversify their retirement into stocks or allocate more funds to investment that can possibly offer higher returns. But they come with more risk, which is a bad idea at a later stage in life. It’s a good idea to keep in mind that only about one-fourth to one-fifth of actively managed funds beat the market benchmark.
4. Delay Minimum Mandatory Distributions
Those who have traditional and ROTH 401(k) plans must start receiving required minimum distributions once they reach age seventy. An RMD means holders can no longer contribute to a 401(k) plan or put off applicable income taxes. But this retirement bookkeeping tip allows you to do just that. Those of age 70 who take a part time job with a retirement plan can rollover an old 401(k) and continue to make contributions. This allows retirees to delay the first RMD until the first of April the year after retirement.
5. Consider Moving
Sure, you may love New York, Miami, or whatever metropolis you live in. Many of these cities come with huge price tags that weren’t meant to be lived in on Social Security alone. Try a suburb of your city or visit family in another city to see if you like it. There’s no rule that says you must retire in the same city you lived in. In fact here in Houston, there are plenty of suburbs that are low cost and a good choice.
Houston Retirement Bookkeeping Tips
And if you are a business or individual who would like help planning a retirement for your family or business, please contact me.