According to the Employee Benefit Research Institute, only 18% of people are very confident about their financial security in retirement. If you're not one of them, it might make sense to consider these three strategies from our Motley Fool contributors that could help keep you from falling short of your retirement goals.
If you're getting close to retirement age and are worried about falling short of your future income needs, take advantage of the catch-up contributions that the IRS allows people aged 50 and older to make to their tax-advantaged retirement accounts.
In an IRA, the standard maximum contribution amount is $5,500 for the 2015 tax year, but those over 50 can contribute an additional $1,000. And in a 401(k) plan, the limits are even more generous: While the standard elective contribution limit in a 401(k) is $18,000 for 2015, those over 50 can contribute an additional $6,000.
Of course, many people can't spare $24,000 to set aside in their 401(k) each year, but even modest additional contributions can add up fast, so consider boosting your contributions from their current level. Let's say you put an extra $1,000 into your IRA starting at age 50 and you plan to retire at 65. Well, that $15,000 in additional contributions can mean an extra $34,000 to your retirement savings, assuming you match the S&P's average total returns of the past two decades.
So if you're afraid of falling short of your retirement savings goals, there's no better time than now to increase your contributions to your retirement accounts.
One move that most people don't consider making is converting traditional IRA or 401(k) balances to a Roth IRA. The reason they ignore this option is simple: It involves paying taxes on the converted amount right now, and few people deliberately choose to pay extra tax before they absolutely have to.
But many people don't realize that Roth accounts also have a lot of advantages that can keep you from falling short in retirement. First, when you take distributions from a Roth after you retire, they're usually free of tax, which stands in stark contrast to the taxable distributions of regular retirement accounts, which force you to withdraw more than you really need just to pay the extra tax. Also, unlike traditional IRAs, Roth IRAs don't require you to take minimum distributions, letting you choose the best time to withdraw that money.
And finally, because Roth IRAs don't affect your taxable income, distributions won't make you ineligible for certain tax breaks, push you into higher tax brackets, or cause your Social Security benefits to become taxable. Add all those advantages together, and it can sometimes be worthwhile to pay a little extra tax now in exchange for big benefits later.
Another way to avoid falling short in retirement is to wait until you're 70 to claim Social Security benefits.
Surprisingly, only 8% of men and 7% of women claim Social Security benefits past their full retirement age, which is 66 for those born before 1960 and 67 for those born in 1960 or later. In fact, nearly 43% of men and 49% of women start taking benefits at 62, setting themselves up for monthly payments 25% lower than what they could have earned by waiting until age 66.
After your full retirement age, for every year you defer taking Social Security benefits up until age 70, your payments increase by 8%. If you wait until age 70, the increase maxes out at 32% above your primary insurance amount (the amount you're entitled to receive when you claim benefits at your full retirement age). Assuming a primary insurance amount of $1,000, we can see how much a person will receive per month based on when they claim Social Security.
By claiming early, retirees get more checks, but those checks are substantially smaller, which means that past a certain age, they will begin to fall behind in lifetime benefits.
If you're worried about falling short in retirement, it pays to wait to claim. By waiting until age 70 to claim Social Security, you'll earn more than the other two cohorts starting at age 81. If you can't wait that long, collecting at age 66 will earn you more money by the time you turn 78 than collecting at the earliest age possible. Those who expect to live a long retirement should especially consider delaying their Social Security benefits.
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