5 Ways to Close the Retirement Gap and Increase Savings

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Last fall The Washington Post reported[1] that 71% of American’s aren’t saving enough for retirement. The article was based on a national survey commissioned by Experian in collaboration with Get Rich Slowly.org. Rather than rehash the reasons American’s aren’t saving enough, I’d like to focus on ways to address the problem.  Let’s make 2017 the year Americans get back on track. Here are five ways to increase retirement savings:

1. Increase contribution to your employer sponsored retirement plan

Workers with a 401(k), 403(b), and thrift savings plans can resolve to increase their contributions by 1% in 2017. One-percent may not sound like much but it can make a significant difference over time. The U.S. Census Bureau reported that median household income was nearly $52,000 in 2013. A 1% increase in savings amounts to $520 a year more in contributions, or a little over $40 a month. This amount compounded over a 30-year career makes a noticeable difference in a retiree’s income.

2. Save the tax refund

The IRS reported the average tax refund in 2014 was $2,700. This amount could be used to fund half of a Roth IRA (maximum annual contribution of $5,500). CNN Money reported only 42% of tax refunds are actually saved. The majority of refunds are being used for purchases or paying down debt.

3. Adjust tax withholding

Rather than wait for the refund to come next April, adjust your tax withholding so you get your refund now in each paycheck. A worker who gets paid every other week could decrease their tax withholding by $104 per pay. If you are typically getting the average tax refund of $2,700, the decreased tax withholding eliminates the refund. Saving money every two weeks instead of as a lump sum at the end of the year can increase a nest egg by thousands of dollars over 20 or more years.

4. Bank the bonus and/or raise

Pay increases could be automatically used to increase retirement savings. Contributions to the employer’s plan could be increased by the amount of the raise. You won’t notice it now in your paycheck but you’ll see it year-after-year as your retirement account accelerates. Use lump sum bonuses to fully fund Roth IRAs for you and your spouse.

5. Cut $100 per month from household expenses

When was the last time you reviewed your monthly budget? Scour your monthly expenses with the objective of finding $100 per month savings. Eat out less, take your lunch to work; cut the cable bill and the cell phone bill. Budget experts say drinking water instead of soda and iced tea could save $30 per month, and it’s better for your health.

Increasing your savings is key to closing the retirement gap

The first step to closing the retirement savings gap is to increase savings. The second step is to assure those savings are growing properly. The Washington Post article quoted the editor at Get Rich Slowly as being surprised to find that of the people who were saving for retirement, most were not invested in the stock market.

The survey did not report exactly how people were investing their retirement funds. However, they were most likely investing in fixed income funds and money markets given the typical selection of investment options through employer plans. These investments are less volatile but usually don’t keep pace with inflation over time.

Many workers are still nervous about investing in stocks. Even setting the volatility aside, most don’t feel comfortable choosing investments. Target-date funds were created to address this issue and have become one of the most popular choices for retirement savers.

The Employee Benefit Research Institute reported that more than 70% of 401(k) plans offer target-date funds in their investment line-up and nearly half of participants in those plans invest in them.

Target-date funds allow the worker to choose a single investment that corresponds to their year of retirement. The worker gets a mix of stocks and bonds appropriate for their age without the need to construct the portfolio. Critics of the funds say they aren’t personalized enough. They also worry their use encourages people to become complacent about investing.

However, all investments have some shortcomings. All the fund really needs to accomplish is for the fund to do a better job of investing than the worker would be able to do on their own.

Saving more and better investing will help Americans close the retirement gap.  Most people know they need to start saving sooner so compounding can work for them over a long period of time. The challenge is to get retirement savings high enough on the priority list.

It’s difficult for 20- and 30-somethings to put aside money each month for their far away retirement days. Student loans, mortgage payments, raising a family, all compete for those dollars and the squeakiest wheel gets the grease – or the dollars in this case. Parents can help their adult children by funding their Roth IRAs and HSAs each year if they are able. This is a great example of where a few dollars can go a long way towards providing retirement security.

Rick’s Tips:

  • Workers with a 401(k), 403(b), or thrift savings plan should resolve to increase their contributions by 1% in 2017.
  • More than 70% of 401(k) plans offer target-date funds in their investment line-up.
  • Parents should help adult children by funding their Roth IRAs and HSAs each year if they are able.

[1] 71 Percent of Americans Aren’t Saving Enough for Retirement, Rodney Brooks, September 26, 2016

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