Personal Finance

It's not too late to save for retirement

Mathew Schwartz, Special to
Federal budget could hurt retirement savings
Federal budget could hurt retirement savings

When it comes to retirement, odds are, you're not ready.

Worse, you probably don't know if you'll ever be ready.

Nearly half of all Americans (46 percent) say they're concerned that they'll run out of money in retirement, according to a new survey by TIAA-CREF.

And with good reason. Last year, more than half of U.S. workers had less than $10,000 saved for retirement, according to a study by the Employee Benefit Research Institute. And another 17 percent of us had only stashed away $10,000 to $50,000—hardly what it will take to finance one's golden years in style.

But one way or another, your retirement is coming, so wherever your nest egg stands now, it's time to start catching up.

The good news is, you probably can. According to a different EBRI study, almost 6 out of 10 baby boomers and Gen Xers will make it to the finish line without running out of cash. And it's not too late to move you into that happy demographic.

Get more from your 401(k)

You've likely heard this piece of advice many times before, but it bears repeating because too few Americans are following it: Squeeze all the juice you can out of tax-advantaged retirement accounts such as 401(k)s and IRAs.

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If you aren't already contributing enough to your 401(k) to get the full employer match, you're throwing away free money—period. However, given the levels at which employer matches typically are capped, advisors recommend you not stop there. The maximum contribution allowed this year is $18,000, plus $6,000 more if you're 50 or older.

That may seem like an unreachable goal for most people. According to a 2014 report from Fidelity, the average annual contribution in 2013 was only $8,327. And the median 401(k) balance at the end of 2013 was a paltry $31,396.

But it's a new year. If you got a raise, consider routing most or all of it straight to your retirement accounts. It's money you haven't had before, so you probably won't miss it much. Do that every year for a few years, and you'll be well on the way to that contribution cap. And if you haven't already, set your contributions to be auto-deducted from your paycheck. That removes any temptation to divert it to other expenses.

The 401(k) isn't the only tax-advantaged option, of course. If you don't have access to one, or if you've maxed out your contributions, add IRAs to your "to fund" list. People under 50 can contribute up to $5,500 a year to their IRAs—Roth, traditional, or both.

Whether you choose the Roth, which allows you to withdraw the money tax free in retirement, or a traditional IRA, for which contributions are usually tax deductible, should depend on your personal tax situation. But if you have the cash, investing in one or the other is usually an excellent idea.

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U.S. tax laws include a couple of rules designed to help procrastinators prepare for retirement. First, you have until April 15, 2015, to add money to your IRA for 2014. (Annual bonus just got paid out? Pick up a fast tax break and plan for the future; it's a win-win.) Next, if you're 50 or older, you can catch up on saving with an additional $1,000 in contributions every year.

And don't forget that if you're 50 or older, you can also contribute up to $6,000 a year extra to your 401(k), thanks to a rule change initiated by Congress back in 2001 due to concerns that the boomer generation hadn't been saving enough for retirement. (See, you're really not alone in this.)

Be careful how you calculate benefits

You may not have saved enough on your own behalf yet. But Uncle Sam has been planning for your retirement safety net since the day you got your first job.

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"Think of your retirement as three different pillars," suggested Christopher John Hickey, a chartered retirement planning counselor at Merrill Lynch. "One of those pillars is Social Security." It's crucial, he says, that you go to the Social Security site and get an update on what your benefits are projected to be at various retirement ages since the agency no longer simply mails that information out to everyone.

"A lot of husbands and wives, if they've been worrying about all their other bills, and not worrying about retirement savings, they forget how much the two of them are going to get in Social Security," he said. It may be more than you expect.

If you're behind on the planning curve, though, consider retiring later, taking the spousal benefit route, or filing and then suspending your benefits, all of which will boost the size of those monthly checks.

And if you're worried, as some are, that "Social Security is going bankrupt," and it won't exist when you retire, take heart. Even if Congress does nothing to fix the program's cash flow problem, and the Social Security Trust Fund is depleted to zero at some point in the next couple of decades, the income from Social Security taxes will still be able to fund benefits at around three-quarters of current levels.

Consider unconventional income sources

Homeownership is still the American dream, and our desire for more and more square footage is undeniable: The average size of houses in this country has been increasing steadily for decades. But a big home can be an expensive way to feed your ego. Certified Financial Planner Sophia Bera, principal at Gen Y Planning, says her favorite piece of advice for those looking to catch up is to take a hard look at how they can cut their housing expenses.

"People who are behind on retirement savings should consider downsizing, selling their home and renting, or paying off their mortgage so that they can drastically reduce their cost of living," Bera said. "Another option would be selling their single-family home and investing in an owner-occupied rental property instead. If they own a duplex and the rent from the other unit can cover their mortgage, then they've also significantly reduced their housing costs to prepare for retirement. Plus, once the mortgage is paid off, the rent from the other unit is all profit."

Chad Smith, a CFP with Financial Symmetry in Raleigh, North Carolina, agrees with that sentiment, but suggests some less conventional ways to recoup some of your costs, such as renting out a room through sites like Airbnb or Craigslist. "A recent client I worked with who was behind the eight ball on retirement savings, had been divorced and was still living in a bigger house than she needed," Smith said. "She decided to rent out an extra room in her house to contract workers traveling to corporations in our area like IBM for short-term periods—six months to a year. This helped her bring in more income that she could direct to her savings."

Needless to say, your house isn't the only item you own that has financial potential hidden within it. Thanks to eBay and its countless cousins, you can resell just about anything you no longer need, from the jewelry you haven't worn in years to the dusty items cluttering up your garage or basement. Each individual sale may not bring in much on its own, but over time, this strategy can add a lot of extra cash to your cushion.

Smith also addresses the financial elephant in the room—where the money you could have been saving in the past went. "Another characteristic of most people in this boat is they've overspent for a period in the past," he said. "The big key here is to work on changing behavior slowly by working opportunity-cost into big decision-making." In other words, when it comes to whipping out your wallet, consider all the things your loose spending habits could prevent you from doing.

She also recommends looking at your household budget for recurring expenses you can trim. "The focus should be on big spending areas that will free up the most extra savings."

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Factor in post-retirement expenses

Here's an important point that many people often forget: Your retirement target figure isn't actually a specific amount of money. That goal number you think you're aiming for is just one in a complex equation. And on the other side of that equation are your total retirement expenses, which depend heavily on your health, longevity and the lifestyle you choose. If you spend less as a retiree (obviously), you need less.

Given that, it's worth considering an option that would reduce your expenses in retirement without changing your retirement lifestyle: Long-term care insurance.

According to the most recent available statistics from the Department of Health and Human Services, an American who lives to age 65 today will, on average, live to 84. And an estimated 70 percent of baby boomers are expected to use some form of long-term care during their lives, according to the Kaiser Family Foundation—likely for several years, and at prices that can drain even the most well-feathered nest egg. And there are large portions of those bills that Medicare won't cover.

Hence, the recommendation that you price out long-term care coverage. It isn't the right choice for everyone, but if you have enough assets to protect, and can afford the premiums, it can mean the difference between outliving your money and having your money outlive you.

Three caveats: First, until recently, long-term care insurance was a better deal than it is now. So good, in fact, that insurers started losing money on the policies as care costs soared and it became clear that they'd underpriced them. For the most part, in the past couple of years, those insurers that didn't get out of the business have adjusted premiums upward to compensate.

Second, while Medicare does not cover long-term care, Medicaid does in many instances. But to qualify for the Medicaid program, you have to deplete your nest egg down to nearly zero, which is not the goal here.

Third, like any other form of insurance, this one is a gamble: You're betting that you'll live long enough to need the expensive care that it covers. The actuaries are hoping that you and most of your fellow customers will live in good health right up until your last days. If they have it their way, you'll pay premiums for years, and get little value for the money.

But here's why these policies make the "recommended" list regardless. The goal of this whole exercise is to make sure that you don't outlast your stash. The longer you live, the more likely you are to get your money's worth out of a long-term care policy, which will preserve your other assets. On the other hand—morbid as it may be to contemplate—if you don't live quite that long, you're also less likely to outlive your nest egg.

Read MoreThe pros and cons of long-term care coverage

In a similar vein, John Jamieson, owner of financial advisory firm Perpetual Wealth Systems and author of "The Perpetual Wealth System," espouses another technique to avoid running out of cash before you run out of time: fixed indexed deferred annuities.

"A successful retirement is about guaranteed income that you can't outlive," said Jamieson.

His advice: "Roll over a portion of your IRA into a solid deferred fixed indexed annuity and fund this annuity with as much as possible in upcoming years."

There are a few benefits, he says. First, this protects your capital from any market downturns; second, with a lifetime income rider, you have an investment that guarantees lifelong income for you and your spouse; third, it gives your retirement nest egg the chance to have strong growth with no market losses along the way.

Earnings on a deferred annuity account are also taxed only upon withdrawal, so there's a tax benefit. And they typically include a death benefit, so that the beneficiary of the annuity is guaranteed the principal and the investment earnings.

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The caveat here is, of course, that guaranteed safety like that comes at the expense of higher growth rates. A fixed indexed annuity can have caps on its returns, so the index it's linked to may have a banner year, and your investment will only return you part of those gains.

Hickey of Merrill Lynch also recommends annuities as a complement to other investments, but he prefers a standard variable annuity—especially if you find yourself in possession of a large sum to invest all at once. Even so, it's a recommendation he couples with a warning: "With an annuity, you've got to be careful what you're buying ... it's a way for you to put a lump sum in for tax-deferred growth, but examining the fees, the expenses, caps and holding periods is crucial."

Don't try to beat the market

If you're really behind the curve on getting started, for whatever reason, you may find the investment vehicles designed to encourage retirement savings—like 401(k)s, 403(b)s and IRAs—are too limiting. You're at the peak of your earning power, but the contribution limits are holding you back.

Hickey mentions the strategy of a client of his who, he says, didn't really get serious about building his nest egg until he was 47 because before that, he'd been more focused on paying for his three kids' education. "He said to me, 'I'm putting $5,000 a month into an S&P 500 index fund—that's what we're going to use for retirement.'"

That's actually a smart move, says Hickey: Buying basic, low-fee index funds steadily to take advantage of dollar-cost averaging generally produces strong returns over time. And considering that even the investing gurus can't consistently "beat the market," novices are well advised to stick with investments that will match the market.

Finally, he offers one last piece of crucial advice: Don't panic.

"Just because you're behind on retirement planning, it doesn't mean that you have to turn up the risk," to the point where you're not comfortable, says Hickey. High-risk and potentially high-yield investments have their merits—but only if you have the thick skin to cope with volatility, and can avoid the emotional behaviors that lead so many retail investors to sell them at the wrong time.

On the highway of investing, even if you're late, if you're not comfortable going 70 mph, then just drive 55. You may get to your goal a bit later, but you'll get there.