Risky spending behaviors, high debt and financial illiteracy
jeopardize the financial futures of many pre-retirees ages 51 to 61 years old,
according to a recent report published by the Filene Research Institute. In
addition, the data show that many pre-retirees use expensive credit card
borrowing, lack both short-term and long-term financial management and planning
and use financial advice only sparingly. There is hope for pre-retirees: The
report identifies steps Americans can take to increase wealth at retirement and
to improve retirement security.
Here's a look at those steps:
1. Open a retirement
plan/account if you don't have one. Nearly three in 10 pre-retirees
don't have a retirement plan or account, according to the report. If you're
among those pre-retirees, consider enrolling in your employer's 401(k) plan if
there is such a plan and contribute the minimum amount necessary to receive the
full match from your employer. Many companies will match your contribution 50
cents on the dollar, up to 6% of your contribution. In other words, if you
contribute 6%, your employer will contribute 3%, making your total savings rate
9%. That's much better than the personal savings rate for the USA, which stands
If you don't have a 401(k), open an IRA at a bank or
brokerage firm, then have a set amount automatically and electronically
withdrawn from your checking or savings account at least every pay period.
2. Create a schedule
to pay down your long- and short-term debt before retiring. About 60% of
pre-retirees have at least one source of long-term debt, and 26% have at least
two. The most important factor driving the increase in debt is the much higher
value of primary-residence mortgages. Check with a bank or mortgage broker to
find ways to reduce the term and/or interest rates on our mortgage. Consider
earmarking a portion of your income to pay down the principal on your mortgage,
over and above your monthly payment.
3. Be prudent when
using credit cards. Nearly 40% of pre-retirees use credit cards
expensively and the very same percentage feel heavily indebted, according to
the report. What's more, one-fifth of pre-retirees have used alternative
financial services, such as payday loans or pawnshops, in the past five years,
the report noted.
According to the report: 74% percent of all respondents in
the survey use at least one credit card, and 56% do not always pay the full
amount due — a behavior that exposes pre-retirees to high fees. Altogether, a
troubling 39% of individuals ages 51–61 report at least one expensive credit
How can you be more prudent with your credit cards and your
debt? The easy answer is to seek help from a qualified financial professional
be it your bank or a legitimate credit counseling agency.
4. Establish a
rainy-day fund. Only a minority of 51- to 61‑year-olds have made
provisions for rainy-day funds to carry them through unexpected economic
shocks, according to the report. The best advice: Start small and don't get
discouraged. Set aside enough to pay for at least one month of living expenses,
and target three to six months as your goal if your job is steady and the
economy is sound, or up to 12 months if your job isn't stable and the economy
5. Calculate how much
you will need in savings to fund your retirement after you stop working. Less
than half of pre-retirees have even attempted to calculate the level of savings
they will need once they stop working, according to the survey. One simple way
to figure out if you've saved enough: Divide how much you've saved by your
household's income. You'll need at least 11 times your pay at age 65 to expect
to have sufficient assets to get through retirement, according to 2012 The
Real Deal: 2012 Retirement Income Adequacy at Large Companies.
6. Take steps to
increase your financial literacy. The smarter you are about money, the
more likely it is you'll avoid making mistakes. And the fewer mistakes you
make, the richer you'll be.
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