Data & Research October 23, 2013

How to Make Up a Savings Shortfall

Employees, especially Baby Boomers, are facing a shortfall when it comes to their retirement savings, a survey found.
Reported by

The Boomers and Retirement Survey from TD Ameritrade revealed that while Baby Boomers have saved, on average, $275,000 for retirement, they believe they will need a median of $750,000 in order to live comfortably.

“Faced with this shortfall, many Americans over the age of 50 may want to consider an important opportunity that could help their retirement planning—catch-up contributions,” Dara Luber, senior manager of retirement, TD Ameritrade, told PLANADVISER. “A catch-up contribution allows investors over age 50 (by the end of the calendar year) to make additional contributions to their IRA or employer-sponsored retirement plans. These catch-up contributions are in addition to regular contribution limits.”

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

For 2013, the 401(k) contribution limits are $17,500 with an additional $5,500 catch-up contribution (for a total contribution of $23,000). As for individual retirement accounts (IRAs), the limits for 2013 are $5,500 with an additional $1,000 catch-up contribution (for a total contribution of $6,500).

Luber said plan sponsors should encourage employees to fully fund their 401(k) or IRA, adding that employees have until tax day, April 15, to make their 2013 IRA contributions. “Remind employees that it’s never too late to start saving for retirement,” said Luber. “Even small amounts over time can make a difference.”

She cited the example of contributing an additional $1,000 a year into an IRA, starting at age 50 and continuing until age 70. This could mean an additional $34,719 towards retirement (using the parameters of $1,000 contributed a year, over 20 years, with a 5% rate of return). Luber also pointed to the fact that an employee fully funding an IRA with $6,500 a year at age 50 until age 70 could mean an additional $225,675 for retirement at age 70 (with the parameters of $6,500 a year, 20 years, and a 5% rate of return).

“If they get a late start it may just mean they have to adjust their retirement expectations, think of other means of support that they may have never considered before or work a little longer,” added Luber.

More information about the survey can be found here.

Data & Research October 23, 2013

High Student Debt Spells Later Retirement

Growing levels of student loan debt could force today’s college graduates to retire more than a decade beyond the current average retirement age.
Reported by

So found a recent study published by nerdwallet.com, a personal finance and credit card comparison website. According to the report, most of today’s college grads won’t be able to retire until at least 73 due to high debt loads, 12 years later than the current retirement average of 61.

Study researchers assumed a life expectancy of 84, a median debt load of $23,300, and an average yearly loan repayment of $2,858 for student-debt carrying workers. That amount of debt could costs the typical worker in this class more than $115,000 in lost wealth potential by the time they reach the traditional retirement age, largely due to delayed and diminished payments into retirement accounts.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Researchers stressed that, with $1 trillion in total outstanding student debt, the plight of debt-straddled college graduates is more pressing than ever. The problem is even more crucial, researchers said, when one considers college tuition prices have soared over 200% in recent decades, with no plateau in sight.

Such rapidly expanding debt loads are forcing many college graduates to prioritize loan repayments over contributions to employer-sponsored retirement plans until at least their early 30s, the study found. This translates to an average retirement savings account balance for debt-straddled college graduates of just $2,466 at age 33—more than $30,000 less than if the student had graduated with no debt.

Compounding the problem is the fact that foregone savings carry lost opportunity costs. At the projected retirement age of 73, the lost savings directly attributable to student debt is $115,096, or nearly 28% of total retirement savings.

Though an increasing retirement age does appear to be an inevitable economic reality for graduates with high levels of debt, study researchers suggested that being conscious of the problem and tailoring financial and career planning accordingly can go a long way towards achieving retirement objectives.

Some of the solutions listed in the study include making above-average yearly contributions to a retirement account, working for an organization with a good 401(k) match, and making sure to invest retirement savings intelligently.

A full copy of the study’s findings is available here. 

«