How to Catch-up Baby Boomers on Retirement Savings
How to Catch-up Baby Boomers on Retirement Savings
Nearly 40% of people fifty-five and older have less than $50,000 in savings, and 33% have less than $10,000. These baby boomers that either couldn’t or didn’t save for retirement have a lot of catching up to do if they want to retire and enjoy their second half. If baby boomers don’t have retirement savings or a pension, they’ll need to survive in retirement on meager social security benefits or family support. If you have clients in this position, or facing this situation soon, there are things you can do for them as their financial advisor to help boost their savings and catch-up.
Take advantage of IRS catch-up provisions
If your clients are at least fifty years old, they can use IRS provisions to make catch-up contributions to retirement accounts. Individuals can contribute an extra $6,000 per year to most 401k plans and $1,000 per year to IRA’s, using pre-tax dollars. These provisions only help though, if your client has the extra money to sock away and is motivated to do so. To help unmotivated clients, develop with them a picture of the retirement they want and work to achieve that goal. Don’t simply rely on abstract financial tables, numbers, and platitudes- that didn’t work thus far, so it likely won’t work now either. Make the situation real for them, and make it appealing. Help them imagine their retirement lifestyle and location, then utilize it as a frequent reminder for them of why they’re saving- what the reward is at the end of their hard work. Joe Sicchitano, head of wealth planning and advice delivery at SunTrust Bank says, “The whole point of that is to bring the future into the present to make better decisions today.”
Reinforce savings through automation
Saving is easier when it becomes a habit. The road to an unhappy retirement is paved with good intentions; the road to your clients enjoying their later years is paved with good habits. To ensure compliance with a savings habit, it is essential to automate it. Instruct your financial advising clients to maximize their 401k or other workplace retirement plan contributions. If they don’t have a workplace plan, instruct them to automate maximum contributions to an IRA or other individual savings account. They can schedule automatic transfers from their bank accounts to remove choice and temptation from the equation.
Budget for increased savings
This can be difficult for individuals to do on their own, but you as their financial advisor can be a big help in this area. Sophisticated in complex financial matters and experienced in evaluating client finances, you may be able to provide retirement-saving advice to clients by modifying their existing spending and finding lower cost alternatives to some of their expenses, freeing up money for retirement savings. Your clients can’t save if they don’t have the money, so according to Sicchitano, “Finding space in [their] budget is key.” Fifty-five percent of Americans spending is discretionary, on things like fast food, alcohol, tobacco, and gambling. If your financial advising practice can help your clients reduce discretionary spending and funnel more money into retirement savings, you can provide a valuable service to them by ensuring a better quality of life in retirement.
Debt should be eliminated before saving, and no one should enter retirement with debt. Terry Dunne, senior vice president and managing director at Millennium Trust Company, says, “Debt is an expensive real problem you have on a monthly basis.” Eliminating debt frees room in your clients’ budget for retirement savings. Once debt is eliminated, your clients will have fewer expenses in retirement.
Make savings a competition
Humans are competitive animals. Make savings competitive and fun. If your clients give you permission to publicize their savings goals, even just between several similarly situated or familiar clients, propose a friendly competition to motivate increased savings among the group. If privacy is a concern, make the competition one of individual achievement, granting small rewards for achieving savings benchmarks. This will also create a pressure to deliver by making your clients accountable to others, you, and themselves. Making saving fun and competitive will quickly get the results you and your clients are looking for. Sicchitano says, “Saving is like eating Brussels sprouts. Even Brussels sprouts are delicious if smothered in butter and bacon.”
Don’t wait to downsize
Many people downsize to a smaller home when they retire. Why wait? Selling a home can provide a quick savings jolt, eliminate substantial debt, and significantly reduce expenses. Downsizing reduces mortgage costs, property taxes, homeowner’s insurance, monthly housing expenses such as utilities, and reduces many associated costs like upkeep and all the stuff with which people fill their large houses.
Limit tax exposure on retirement savings
This is another big area where you, the financial advisor, can offer expert advice for your clients. Because different types of accounts are taxed at different rates, spreading your clients’ money across different types of accounts can reduce their tax burden when they withdraw. Contributions to 401k plans are made pre-tax, which reduces your clients’ present taxable income. This benefit can provide a huge boost to retirement savings catch-up for those able to take advantage of it. Neal Ringquist, executive vice president of sales and marketing for Retirement Clearinghouse, says, “You’re compounding dollars that would otherwise be taxed. You need every dollar you can get.”
For some clients, catching up will be impossible. Many without savings at this age simply can’t save- either because they don’t make enough money or because they have other financial obligations, extreme debts, or other conditions preventing them from adequately preparing for retirement. For others who can save, but don’t, it may simply be too late or it may be impossible to convince them to put their money away instead of spending it on vices or other discretionary purchases. For these clients, the best advice may be to delay retirement- to some, for years, to others, indefinitely. Delaying retirement will afford them more time to save and reduce the period they’ll need to rely on savings.
How account aggregation can help
Account aggregation gives you, the financial advisor, access to your clients’ complete financial picture: their income, assets, liabilities, expenses, goals, projections, and more. Viewing all this information, you the expert financial advisor, can see clearly what your clients need to do to prepare for retirement and build with them a plan of action that will result in the realization of their goals. Without account aggregation, you will be in the dark on many aspects of their financial picture. You will have many blind spots that will inhibit your ability to help your clients achieve their goals. With account aggregation, you will have accessible every tool in your toolbox, every piece of information, every bit of data required to successfully advise your clients in planning for their retirement.