WSJ Your Money Briefing - Behind On Saving for Retirement? Here’s How to Catch Up

Episode Date: August 26, 2024

Many Americans in their 50s feel unprepared for retirement because they haven’t been able to put away enough money. Wall Street Journal reporter Hannah Miao joins host J.R. Whalen to discuss steps they can take now to boost the value of their portfolio. Sign up for the WSJ's free What's News newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

OCI is the single platform for your infrastructure, database, application development, and AI needs. Do more and spend less like Uber, 8x8, and Databricks Mosaic. Take a free test drive of OCI at oracle.com slash wall street. Here's your money briefing for Monday, August 26th. I'm JR Weyland for The Wall Street Journal. Last week we focused on how some members of Generation X who are approaching retirement are not in a financial position to stop working. Today, we're looking at ways they can catch up. The IRS allows people 50 and older to make additional contributions to 401k's or other similar employee sponsored retirement plans. This year in 2024, everyone is allowed to put $23,000 into a 401k or an

employer sponsored retirement plan. If you're 50 and older, you can add an extra $7,500 on top of that. Wall Street Journal reporter Hannah Miao spoke to financial professionals about other ways Gen X can better prepare for retirement. She'll join us after the break. Introducing TD Insurance for Business with customized coverage options for your business. Because at TD Insurance, we understand that your business is unique, so your business insurance should be too. Whether you're a shop owner, a pet groomer, a contractor, or a consultant, you can get

customized coverage for your business. Contact a licensed TD Insurance advisor to learn more. Americans close to retirement age who feel uneasy about the amount they've saved have options to catch up. Wall Street Journal reporter Hannah Meow joins me. Hannah refreshes as to why many in Gen X or those approaching 60 feel unprepared for retirement. Gen X is considered the guinea pig of the 401K system.

So the 401K system really became popular starting in the 80s. So Gen X's career really lined up to begin at the start of this transition from pension systems to a 401k system, where it's up to you to save for your retirement and invest it. And when Gen X was starting out their career, a lot of the options that make 401ks more helpful for workers these days, like automatically enrolling workers in them or automatically upping contributions, were not quite commonplace yet. So they were starting from a place of this being a new thing and trying to understand

this transition. You spoke with financial advisors who said that people who are wary of what they have in their retirement portfolio still have time to make up for shortfalls. What's the first thing they should do? First is to take a very thorough look at your finances. And you can start by taking a look at your expenses. Obviously, it's not always fun to see exactly what you're spending on things.

But once you do an audit of that and get a sense of what you're spending on necessities and what you're spending on everything else, it helps you understand first a sense of how much money you actually are going to need in your retirement to keep up with your regular day-to-day living and also where you could potentially cut back on spending to increase your savings. And then from that point on, you should also take a look at where your retirement funding is right now. What are the savings you have in place? What are the 401Ks plans that you have? Do you have a pension that you're entitled to? Getting a sense of that full picture.

And then from there, it helps you calculate exactly how much more you want to save to meet your goals. The pension and 401Ks seem to fall under a category of sources of income people might have forgotten about. What else could be in that category? Yeah, so people have forgotten about 401ks from previous jobs. You don't always roll it over to an IRA or to your new 401k. So tracking that down can be really helpful. I heard from some advisors who had clients who were surprised that they had a 401k from

2030 years back. You should also be thinking about income sources like social security. I know a lot of people feel a lot of gloom and doom about whether social security will be there for them when they retire. But you can do a calculation that factors in what your projected social security benefits might look like. But think about those kinds of income sources that you might not be thinking about now. We often hear about workers in their 50s being able to make catch up contributions to their retirement accounts. How does that work? The IRS allows people 50 and older to make additional contributions to 401Ks or other similar employee-sponsored retirement

plans. So, for example, in this year, in 2024, everyone is allowed to put $23,000 into a 401K or an employer-sponsored retirement plan. If you're 50 and older, you can add an extra $7,500 on top of that. So these are ways that if you're trying to up your contribution rate, you can add it to that 401k, get that tax benefit in the meantime. But starting in 2026, just keep in mind that if you are a high earner, meaning you're making more than $145,000, those catch up dollars will have to be put

into Roth accounts, which means the contributions will be post-tax, but the withdrawals will be post-tax, but the withdrawals will be tax-free. Soterios Johnson Like many Americans, people approaching retirement age also have several categories of debt. How do financial professionals suggest they pay that down? Emily Eaglin So advisors I spoke to said that people should really prioritize paying down high interest debt before they jump all in on upping their

savings. For example, credit card debt, some interest rates can be 24%, 25% on those unpaid balances. So you definitely want to tackle that so it doesn't snowball and become even greater. Even then, the idea of having a fixed income in their later years might make people fearful of running out of money. How do financial advisors you spoke with suggest the retirees plan to start the withdrawal process when they leave the workforce? Many in the financial industry talk about the 4% rule. So this is the idea that historically, if retirees withdraw 4% from their retirement savings

in their first year of retirement and adjust their spending based on inflation from there on out, they have a historically low probability of running out of money. And so this is a common benchmark people use to advise retirees on that first year of retirement. And it's just a rule of thumb to help retirees think about how to plan for making those retirement savings last. And if putting away lots of money just isn't enough for some people to live a comfortable retirement, what other options do they have? Saving is just one of the levers that people can use when thinking about their retirement plan. Other options include pushing back your retirement age a little bit longer so you can keep saving for several years.

Some retirees might also pursue part-time work in their retirement. If you postpone the age in which you take Social Security benefits, you're entitled to a larger payout from Social Security. And if you own a house, some retirees also downsize so that they're able to tap some of that home equity and utilize that to supplement their retirement income. So there's no one size fits all approach. And a lot of the advisors I talked to stressed that it's really a give and take. If you're saving more for your later years,

you're obviously not going to be able to spend as much now. So it's about knowing what your priorities are and making the decisions that align with both your financial health and also what your values are. That's WSJ reporter Hannah Miao, and that's it for your money briefing. This episode was produced by Zoe Kolkin

with supervising producer Melanie Roy. I'm JR Whalen for The Wall Street Journal. Thanks for listening.