So how do you make up the necessary ground? First, stash the full $16,500 you’re allowed every year into your 401(k), 403(b) or other work-based retirement account. If you’re 50 or older, you’re eligible to make an additional $5,500 in catch-up contributions; do that, too. And because even $22,000 a year may not be sufficient when you’re aiming for seven figures, look at supplementing these accounts with a nondeductible IRA contribution ($5,000 if you’re under 50, $6,000 if you’re 50 or over). If you can do more, put money in a nonretirement brokerage account.
Also, max out your contribution to a health savings account if you have one; these accounts are available to people enrolled in a high-deductible health plan. In 2010 the limits are $3,050 for singles and $6,150 for families, with an extra $1,000 for people over 55 not on Medicare. HSAs are really retirement accounts in disguise, because once you retire, you can use the money for things beyond health care. (Don’t confuse HSAs with FSAs, or flexible spending accounts, which are funded with your pretax contributions to pay for unreimbursed health care or day care expenses—over-the-counter drugs, co-payments, glasses and the like. FSA dollars are use-it-or-lose-it each year.)
No matter where you’re stashing your savings, put those contributions on autopilot. Auto-investing is the key to success, because it’s easier. The balances in the retirement accounts of workers whose companies automatically enroll them in retirement savings plans add up to nearly 10 times their final incomes when the workers reach 65, according to researchers’ simulations. The balances in accounts of people not auto-enrolled? Just 2.4 times their final incomes. If you can’t automate at work, do it via your financial institution. Another tip: Bank your raises. Each time you get a salary bump, increase the money you’re stashing away by the same amount. Windfalls, bonuses, tax refunds and birthday money also go right into IRAs.
Roadblock 3: You’re tempted to raid your retirement stash too soon
One way to make your retirement accounts last longer is to avoid tapping into them until well after your official retirement date. Each year that you produce enough income to live on without touching your nest egg means another year that your retirement stash can grow tax deferred—until you reach age 70½ and start making mandatory withdrawals, in the case of a traditional IRA or 401(k). That doesn’t necessarily mean staying in the job you have now. Armstrong cites clients who “retired,” then joined the Peace Corps for several years. They didn’t make a lot of money, but they didn’t have to tap their retirement capital, they ultimately received more Social Security because they delayed taking it, and they had several fewer years of postretirement life to pay for.
If you don’t feel qualified to nab a desirable nonretirement gig, it’s better to retool now than 10 years down the road. “Constantly update your résumé, your skills, your appearance,” says Jeri Sedlar, coauthor of Don’t Retire, Rewire! Think about what the next opportunity might be and how you could transition into it. “Community colleges often offer certification programs that are less costly or time consuming than going back for an additional degree,” Sedlar points out.
Roadblock 4: You don’t know how to make your nest egg last
I was recently on a panel with superstar economist Burton Malkiel of Princeton University, author of A Random Walk Down Wall Street, among other books. We were asked about financial mistakes we’d made over the years. Malkiel talked about not rebalancing amid the bubble of 2000 when too much of his portfolio was in technology, particularly in Cisco—which, despite being “the backbone of the Internet,” as Malkiel put it, cratered by 90 percent. His point: No one knows what the market is going to do. My point: Even superstar economists blow it sometimes.