(Marketwatch) This November marks the 40th anniversary of the legislation that paved the way for 401(k) plans, meaning that many workers on the cusp of retirement have had access to a 401(k) during their entire careers.
While a lot of these folks may be utilizing a variety of strategies to prepare for retirement, plenty are relying heavily on their workplace plans. In fact, nearly 40% of baby boomers (aged 54 to 70) said in a recent study that a 401(k) is their largest or only source of retirement savings.
As the youngest members of the boomer generation think about retiring in the next decade or so, they may be feeling a lot of pressure to “get it right” financially, and they may not even have a clear picture of what that means.
In that same survey, nearly all boomers said they know what their ideal credit score should be, yet more than a third don’t know how much they need to have saved up for retirement, and a quarter are still unsure about what percentage of their salary they should be contributing to their 401(k).
In the face of this uncertainty, and with so much at stake, the millions of Americans for whom retirement is impending should be armed with as much information as possible.
Here are four actions this group should consider in the crucial years leading up to retirement.
For those who are still unsure of their retirement income needs, there’s no time like the present to try to figure out a more concrete target.
Of course, everyone’s financial situation is different, and it often changes as retirement unfolds, but there are some general guidelines worth noting.
First, my colleagues at the Schwab Center for Financial Research suggest that the average person should aim for a retirement portfolio 25 times larger than the amount they expect to withdraw from it during their first year of retirement.
Keep in mind, there will be a range of demands on these funds, from day-to-day housing and food, to well-earned vacations, to potential support for children and grandchildren, and it is easy to underestimate how much you’ll spend when you are no longer working.
Another basic, but often overlooked, step in the retirement investing process is making catch-up contributions. While the annual contribution limits for 401(k)and IRAs in 2018 are $18,500 and $5,500, respectively, there is more room for investors nearing retirement.
Those who will be aged 50 and above by year’s end can contribute an additional $6,000 to their 401(k) and $1,000 to their IRA. I think of catch-up contributions as “supercharging” your retirement savings, as they can lead to a significantly larger portfolio in retirement.
In 2019, the limit increased to $19,000, up $500 from $18,500 in 2018, for 401(k) plans. The catch-up contribution limit for employees 50 and older remains unchanged at $6,000, which means an employee 50 or older can put as much as $25,000 in their 401(k) plan.
The IRS is also lifting the contribution limit for individual retirement accounts for the first time in six years, to $6,000 up from $5,500 in 2018.
Address high-cost, non-deductible debt
Debt is a reality for most of us, but the prospect of moving into retirement with debts looming can be an especially disheartening one.
A good place to start in the years leading up to retirement is with high-interest debt, like the kind that comes from credit cards. Write down all of your credit card balances in order from the highest-interest card to the lowest, and make an effort to pay down those with the highest interest first while continuing to make at least the minimum payments on the others.
Consolidating these balances on a low-interest credit card is another option, but be sure to look out for any fees or hidden costs lurking in consolidation offers.
Your mortgage is another important piece of the debt puzzle. The decision to pay off your mortgage before retirement is a very personal one, and it’s often driven by the associated interest rate. If this rate is low, you may choose not to pay your mortgage off early, keeping the cash on hand for liquidity and diversification’s sake.
On the other hand, paying off your mortgage early frees up the funds for day-to-day expenses, health care and other essentials, and owning a home outright also offers many people peace of mind.
Factor in the cost of care — and consider long-term care insurance
As people live longer and health care needs become more complex, many of us may find ourselves in need of long-term care. This may require professional support far above what a spouse or family member can provide, and it can be very costly.
One way to prepare is to consider enrolling in a long-term care insurance policy, which generally covers the costs of care needed beyond 100 days, up to a specified number of days or benefit amount.
This kind of insurance can be very expensive, though, so you must consider all your options to help you decide whether paying high premiums now will save money in the long run.
While these considerations are a good place to start, the reality of retirement preparation has many more moving pieces. In addition to 401(k)s and other investment accounts, there is also Social Security to consider when sketching out a retirement paycheck. It’s important to remember that few people have it all figured out, and it’s not only OK, but wise to ask for help.
If you’re not sure where to start, a good place can be your 401(k) administrator. Many of them offer tools, financial professionals and specific guidance that can help you plan your roadmap to retirement.