Some basic principles apply to retirement planning at virtually any stage of life. These basic principles help create a solid foundation for saving. However, they do not necessarily help you deal with some of the challenges, such as catching up later in life.
You may not be able to save for retirement early in your career for a wide range of reasons. The unfortunate reality of this problem is that you will need to play catch-up at some point. Luckily, if you are dedicated to saving, you can often make up for lost time more effectively than you might imagine.
While you will lose out on much of the power of compounded interest, you may still be able to meet your retirement goals with the right approach. Some tips to keep in mind for catching up include:
1. Contribute fully to any available 401(k).
When playing catch-up, if at all possible you should focus on maxing out contributions to a 401(k) available through your employer. A 401(k) is a powerful tool. Someone who is 40 and maxes out contributions to a 401(k) could have more than $1.3 million saved by the time that person reaches 65, assuming an 8-percent return and not using the catch-up contribution discussed below. With that additional boost, even more money can be saved.
Even without any growth, maxing out a 401(k) is a significant amount of savings that really make or break retirement. The numbers above also assume that employers are not contributing to the 401(k). The fact that some employers offer free money to save for retirement is even more reason to prioritize a 401(k).
2. Make qualified catch-up contributions.
The IRS recognizes that you may need to save more as you get closer to retirement. For this reason, individuals who are 50 or older can make qualified “catch-up contributions” to certain retirement accounts. These catch-up contributions are additional deposits beyond the standard limits that exist for younger investors.
Currently, catch-up contributions allow you to save an additional $6,500 annually in a 401(k), 457, or 403(b). In addition, you can save an extra $1,000 per year in a Roth or traditional IRA, as well as an additional $3,000 for a SIMPLE IRA or 401(k). These increases are subject to change from year to year, so it important to stay current with policies.
3. Open a Roth IRA account.
Once a 401(k) is maxed out, you may wonder which vehicle is the best for additional savings. For many people, the answer is a Roth IRA. A Roth account is tax-advantaged by allowing contributions to grow without taxation, much like a 401(k). However, the account is funded by post-tax money and thus you can make qualified withdrawals without paying any taxes.
A Roth IRA can help make a better overall withdrawal strategy while also opening up new ways to save. You can only contribute to a Roth IRA when you’re modified adjusted gross income is less than $139,000 for individuals and $206,00 for couples. The typical limit is $6,000 annually, but high earners who earn less than the maximum MAGI may have lower limits.
4. Focus on paying off your mortgage.
One way you can catch up on your retirement savings is by paying off an existing mortgage early. While you should continue to invest for retirement, if you can also pay off your mortgage, you will retire with a major asset aside from retirement accounts.
Moreover, once the mortgage is paid off, you can channel all the money you would otherwise put toward the mortgage into retirement savings vehicles. Doing this supercharges retirement savings and can quickly build wealth. Research has shown that millionaires tend to pay off their homes in an average of 10.2 years because they understand the power of owning the asset outright.
5. Reduce monthly expenses as much as possible.
Catching up on retirement savings generally means finding ways of putting more money into existing accounts. Sometimes, this involves making sacrifices. A good place to start is looking at your monthly budget and figuring out where cutbacks can be made. Subscriptions and memberships add up quickly, as does eating out instead of cooking at home.
You may also consider contacting your insurance carriers to negotiate better deals, as well as your cable and internet providers. Sacrifice is not always necessary. Sometimes, making some smart decisions or taking the time to talk to a company can save hundreds of dollars each month and thus put thousands more each year into a retirement account.
6. Consider pushing back retirement a bit.
As a last-ditch effort to save more money, you can push back your plans for retirement a few years. While still working, you can save a considerable amount of money, especially if you reduce your other bills and have paid off a mortgage. In these circumstances, spending a bit more time in the workforce and channeling all that money into retirement accounts is the best way to meet retirement goals.
While it can be disappointing to spend more time in the workforce, the financial security provided by that additional money is often worth the sacrifice. After all, retirement will hopefully last decades. This means that financial security can save you a lot of stress and headache.