As the baby boomers approach retirement age, the generation that came to widely rely on the 401(k) is finding itself unprepared for their financial future. According to a new study, the median household headed by someone 60 to 62 has less than a quarter of what they need for retirement. That's a terrifying number.
Mellody Hobson, president of Ariel Investments and "Good Morning America" personal finance contributor, appeared on the show this morning to answer the following questions and provide tips to help you stay on track for your retirement.
When 401(k)s were first introduced, they were meant to be a retirement supplement, but they have now evolved into a full retirement solution. Baby boomers, the people who are retiring now, were the first generation to be exposed to 401(k)s. They got a late start. Even if they started using them from the day 401(k)s were first used in 1981, some still would have started at around age 35, which means their contributions have not had that much time to benefit from compounding.
A second reason 401(k)s may appear as though they are not doing the job is because people are not saving enough. The average worker currently contributes about 8 percent of their income in their 401(k)s. So if you make $50,000, that is only about $4,000 a year, which is way too low. Retirement accounts have also been hard hit by the recession. This has led to loans and hardship withdrawals for some. So people are taking assets out, and they are not growing at a flat return. This is important because equities should be the fastest way to build a portfolio.
The most important thing you can do is work longer, even if only part-time. You will also need to save more. Working and saving more will help you reap a greater benefit from the power of compounding.
Also, delay taking Social Security, she said.
If a person is entitled to full benefits when they are 66, and if they start withdrawing at 62, then they will only receive 75 percent of their benefits. But if they wait until they are 70, then they would get 32 percent more than their full benefits.
Plus, you can catch up on your 401(k) savings. The government wants to help older individuals who got a late start on their 401(k) savings. If you are below 50 you can contribute up to $16,500, but if you are over 50, there is a catch-up provision which allows you to put another $5,500 in your 401 (k) for a total of $22,000. Definitely try to take advantage of this, Hobson said.
Health care costs are rising at an astronomical rate for people of all ages. A study by Fidelity Investments found that retiree healthcare expenses rose by 4.2 percent in 2010, and they have gone up by 56 percent since 2002. Another study by Aon Hewitt found that in the past 10 years health care premiums have doubled and the employee's share of medical costs have tripled during that same time period.