How To Play Catch Up With Retirement Savings Late In The Game
Guest contributor, Jon Dulin
It’s well known that Americans are not great at saving for retirement. If life got ahead of saving for the future, these tips will get you on track for retirement.
According to the U.S. Census Bureau, the average savings of a 50 year old is just under $44,000 (as reported by statistic brain.com). It’s unlikely that $44,000 will last very long in retirement.
If you’re in this state, with less than optimal savings for retirement, what are your options?
Do you call it a day and give up?
Or do you find a way to increase your retirement savings so that you can still enjoy retirement?
Here are some feasible tips to increase your retirement savings.
Quick Note About Retirement Nest Eggs
Before I get into the tips, I have to be 100% honest with you. If you have $50,000 or $100,000 saved for retirement and you are age 50 or older, you aren’t going to reach $1 million or more and live the high life in retirement. It just isn’t possible without winning the lottery or robbing a bank. But don’t let this discourage you. You still can have a very comfortable retirement, you just have to make it a point to follow the tips below.
5 Tips To Save Enough For Retirement (For Late Starters)
Tip #1: Stay Calm
The first step is to keep things in perspective. You aren’t going to retire tomorrow. In most cases, you still have anywhere from 5 to 15 years left to play catch-up. This is a decent amount of time. Now that you are over 50, you can contribute more to both a 401(k) plan and an IRA. While it seems as though you will never be able to afford retirement, remind yourself that 10 years is a long way off. A lot can happen in the next decade. The key is that you have to start acting now, because each day is very important.
Tip #2: Don’t Overreact
It’s a common mistake for people who haven’t saved enough for retirement to overreact. The classic example of this is putting all of your money in stocks to earn a higher return. This is exactly what you shouldn’t do. It is way too risky.
When you have 30 years or more until retirement, you can afford to invest 100% of your retirement money in stocks. But when you are older, you can’t afford this risk. The market could collapse and suddenly you have 40% less in savings. While the market will rebound, you don’t know how long it will take to do so. The current market rebound, which started in 2009, happened quickly but that isn’t always the case.
Your best bet is to pick an asset classes allocation that contains some stocks, but also has a healthy amount of bonds.
The reason you don’t want to avoid stocks completely is twofold. First, you need the growth now and second, we are living longer in retirement and therefore you need your money to grow and compound during retirement.
Tip #3: Start Saving More
Whatever you are saving now needs to be increased.
If you are saving in a 401(k) plan at work, contact human resources or your benefits department and increase your contribution amount. The more you increase it, the better off you will be. Even if you only save an extra 2% more per paycheck, it’s better than nothing. If you are making $40,000 per year, saving 2% more from your paycheck is about $40 per month. I doubt you would miss that from your check. Over the course of a year, that $40 is an extra $1,000 you saved.
In addition to increasing your 401(k) contributions, you need to save money in an IRA. If you have an IRA set up, create an automatic investment plan. Put $50 or $100 a month into the account. If you don’t have an IRA set up, then set one up and start an automatic investment plan. If you don’t know where to open an account, check out my online broker comparison chart. The chart is an excellent resource and breaks down features which help you find the best firm in which to invest your money.
Tip #4: Take A Hard Look At Your Expenses
The lower your expenses are, the less money you are going to need to retire. Now, I’m not suggesting you live like a hermit. I want you to enjoy your retirement. But you will have to make some sacrifices. Start looking at your expenses now and try to cut back. The more you can cut now simply means the more you can put towards savings. Plus, it means you will be used to living on less once retirement does come.
First look at your large expenses. This includes your mortgage and insurance coverage. Are you close to paying off your mortgage? It might make sense to pay it off to free up a large sum of money each month to invest. But you will have to run some numbers to see if this works for you. It most likely won’t make sense to take $100,000 out of savings to pay off your mortgage. But, it might make sense if your mortgage balance is only $10,000.
Once the large expenses are reviewed, look at smaller expenses. Is there anything you really don’t need? Review everything – food, cell phones, utilities, etc. I’m certain you will find some things you can cut from your budget.
Tip #5: Consider Working Longer
I know most people want to retire as soon as possible. But there is a very good reason why you may want to consider retiring at 70 instead of 65. What is this reason? A guaranteed 8% return on your money.
For every year you wait after age 65 to start collecting Social Security, the size of your benefit will increase by 8%. Unfortunately, this 8% increase is finite. It ends when you reach 70. Therefore it doesn’t matter if you collect at 70 or 75, your Social Security benefit will remain the same amount. This is a strategy I highly encourage you to consider. You are close enough to retirement age that you don’t have to worry whether or not Social Security will be there for you. Social Security will be around for the next several decades and likely much longer. So if you are set to receive an annual benefit of $15,000 at age 65, you could see an annual benefit of close to $22,000 by waiting to collect for 5 years. Over a 20 year period that is a difference of close to $150,000!
Tip #5: Consider A Reverse Mortgage
When reverse mortgages first came out, they weren’t the best option for retirees. They were loaded with fees and were iron clad, meaning you couldn’t get out of them. Now, things have changed and reverse mortgages are much more attractive. For some reading this, a reverse mortgage might be the option that helps you to live comfortably in retirement. If you aren’t planning to leave your house to your heirs, consider the financial benefit of a reverse mortgage.
Putting It All Together
Here is an example showing the positive impact of making these changes now.
Let’s assume you are 50 years old now and increase your 401(k) contributions and IRA contributions by $150 per month total. You also decide to work until age 70. So, for the next 20 years, you invest $150 per month ($1,800 a year) that grows at 6% per year. In 20 years you have an additional $70,000 for retirement. This is in addition to your current retirement account balances and doesn’t take into account your Social Security benefit (and any pension or additional retirement income).
If you can save $300 more in total ($150 more than the example above) and keep all other variables the same, you will have close to $140,000 more for retirement.
As you can see, all hope is not lost if you are behind on your retirement savings. The key is to start saving more now and not make the fatal mistake which so many others do; getting too aggressive and putting everything in stocks. (Or worse, doing nothing at all.) Keep a balanced portfolio and focus on saving as much as you can. If you do this, your chances for a comfortable retirement increase.
If you have any questions or need any help at all, please reach out to me. I am here to help in any way I can.
Author Bio: Jon writes at Money Smart Guides, a personal finance blog that offers readers simple steps to help them get out of debt and then breaks down investing so they can begin saving for their future.