Retirement Plans Aren’t Where They Should Be – What Should You Do?

April 9, 2013

no retirement moneyPersonal finance blogs, financial media, and financial advisors are awash and plentiful in advice on how to build the biggest retirement portfolio possible. But despite the subject’s incredible popularity, real world application isn’t living up to the hype. The numbers on 401(k) plans – the cornerstone of self-directed retirement planning – are not encouraging.

A good news/bad news report came out a few weeks ago giving the latest numbers on 401(k) plans, 401(k) Balances Hit Record Highs. The headline contains the good news, 401(k) plans have hit record highs. But the bad news is that those record numbers aren’t nearly enough to allow the average person to retire comfortably.

According to the report, the average 401(k) balance at the end of 2012 is $77,300, and for those 55 and over it stands at $143,300. Record numbers maybe, but completely insufficient. The article even describes the numbers as “dismal.”

Let’s say that the number for the over-55 crowd doubles by age 65, and the overall quadruples by the same age. That will raise the average 401(k) balance to roughly $300,000 by retirement age. Using the “safe withdrawal rate” of 4%, that would yield an income of just $12,000 per year per retiree. Most people will need an amount several times higher than that to retire comfortably.

Sure there will be Social Security income, but there will also be inflation between now and then. If your 401(k) plan falls neatly into the average numbers, you’ll have to take action in order to have the retirement of your dreams. But if you have even a few years between now and retirement, there’s plenty you can do to improve your situation.

1. Increase your retirement contributions as soon as possible.

The first, best course of action is to increase your contributions. Find the maximum contribution you can make to your company plan, and work to hit that number as soon as possible.

Beyond your employer plan, make contributions to a traditional IRA or a Roth IRA, if you’re within the income limits to do so. Even if your traditional IRA contribution isn’t tax deductible, make the contribution anyway. The earnings will grow on a tax-deferred basis, and the non-taxable contributions you made won’t be taxable upon withdrawal.

2. Save money outside your retirement plans.

You don’t have to limit your retirement planning to tax-deferred retirement plans. Any money that you save and invest can be used for retirement. Best of all, non-retirement savings have no limits on contributions – you can save as much as you’re able.

There’s an advantage to having non-tax sheltered investments in retirement too. Since they aren’t tax sheltered, they won’t be taxable on withdrawal. That can represent a form of tax diversification on your income sources during retirement.

3. Get out of debt.

If you won’t have a large enough retirement portfolio to provide you with all of the income you will need, the next best strategy is to lower your living expenses. That starts with paying off any debt that you have.

This will provide a double advantage too. The money that you are no longer paying to service your debts can be redirected into savings and investments that will get you closer to your savings goal. And once you retire, the absence of debt will mean that you will need less money to live on.

4. Start developing additional income streams.

Finally, it will help if you also develop additional income sources. Like paying off debt, there is also a twin advantage here. Additional income streams will lower your dependence on your investment portfolio in retirement, and also provide more money for savings and investing between now and then.

You may also be able to set up a dedicated retirement plan for your new income ventures, such as a SEP-IRA.

You can choose passive income sources, such as rental real estate or some sort of royalty arrangement, or an active source, such as a secondary career or side business that you can continue to work as a part-time venture after retirement.

You may be one of the people on the high end of the 401(k) balances, but if you’re not – which is apparently the case with the majority of people – there are other options. Try putting some of them to work now.

Do you feel that your 401(k) will be sufficient to provide you with the retirement you hope to have? If not, what other arrangements are you making?


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Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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2 Responses to Retirement Plans Aren’t Where They Should Be – What Should You Do?

  • Robert Jacobs

    Our 401k/investment savings will be sufficient based on current projections. However, the 401k problem is not a 401k problem, it is a behavioral problem. Personal finance behaviors is what drives spending and saving. Our culture wants it now and does not have the patience to save, that is why the average American racks up around $50-60k in debt and cannot adequately save for retirement simple because their money is going out the door in the form of debt payments.

    • Kevin

      Hi Robert–Absolutely. Our culture is very much driven by the “eat, drink and be merry” mindset that leaves little room for deferred gratification. Of course, the media doesn’t help with all the ads that make us feel that we have to have it now. That message benefits the advertisers but hurts us. The people who do save adequately are fighting that trend.