Retirement Strategies for Late Starters
Saving for retirement is essential, but many Americans don’t have enough money to allow them to retire comfortably. Waiting too long to begin saving may mean that you’ll struggle to catch up, and it may even mean that you can’t afford to maintain your lifestyle after you retire.
At CMP, we work with our clients every day to help them prepare for retirement, including providing tips about budgeting and investments. If you don’t have as much saved as you’d like, whether you’re close to retirement age or will be working for decades to come. Here’s our guide on how to catch up on retirement savings starting today.
How Much Should You Be Saving for Retirement?
Before we reveal the best ways to fast-track your retirement savings, let’s talk about how much you should be saving. The average American has $141,542 saved for retirement, while the median 401(k) balance is just $35,345. These numbers tell a sobering story about retirement savings in the United States.
To put these numbers in perspective, here are some guidelines for how much you’ll need to save for a comfortable retirement. There are two basic methods to use.
- The multiple method. This method uses your income at retirement and multiplies it by 80% to determine how much annual income you’ll need after retirement. You would then multiply that number by how many years you expect to live beyond retirement to determine how much your total savings should be. For example, if you were earning $100,000 at retirement and expected to live 20 years after retirement, you would need $80,000 X 20, or $1.6 million, to retire comfortably.
- The 4% rule. This method works backward by estimating the income you would need in retirement and dividing that by the return you expect on your investments. If you needed $70,000 in annual income for retirement, you would divide that number by .04 to arrive at $1,750,000 in savings. At this level, you could live indefinitely on the proceeds of your investments. There’s a little wiggle room built into this formula because it assumes an average annual return of 5%.
Said in a general way, you will need a retirement goal to have enough savings to allow you to live comfortably for the time between when you retire and when you die. Some people plan to downsize and live quietly after retirement, while others may want to travel the world. You’ll need to factor your plans into your calculations and save accordingly.
9 Best Ways to Catch Up on Retirement Savings
If you’re getting a late start on retirement savings, there are things you can do to catch up and get on track. Here are the 9 ways we suggest.
1. Take Advantage of Catch-Up Contributions
If you’re over 50, now is the time to make the most of what you can contribute to your employer-based retirement plan or your individual plan. Depending on the type of retirement fund you have, you may be able to make catch-up contributions to boost your retirement savings.
401(k), 403(b), and 457(b) plans have a catch-up contribution limit of $6,500 for people 50 or older in 2022, on top of the $20,500 annual limit. That number will increase to $22,500 for the annual limit and a catch-up of $7,500 for 2023. Traditional or Roth IRAs allow you to save an additional $1,000 per year for 2022 and 2023, while SIMPLE 401(k) and IRA plans allow catch-up contributions of $3,000 for 2022 and $3,500 for 2023.
2. Delay Collecting Social Security
Social Security is likely to play a significant role in your retirement planning, even if you have an employer-based retirement plan.
Social Security distributions are adjusted for inflation and guaranteed by the federal government. You may begin collecting Social Security early, but if you can delay until you’re 70 years old—the age at which you must begin collection—you can collect a larger monthly income and be more comfortable in retirement. While this option isn’t something that will work for everybody, you may want to consider it.
3. Start Making Smart Investments
If you’re planning to make investments as a retirement strategy and you’re over 50, don’t make the mistake of becoming overly aggressive.
You have less time to build a valuable portfolio out of your nest egg, but that’s no reason to gamble with what savings you do have on risky investments. Wise investments can grow in just a few years, even if you have small savings.
That said, it’s not a good idea to be too conservative either because you risk not earning a large enough return on your investment to accumulate the savings you need. It’s a good rule of thumb to limit your stock investments to 100 minus your age. So, someone who’s 50 years old would want no more than 50% of their investments in stocks.
Working with a CPA or professional financial advisor helps manage your asset allocation and prevent unnecessary risks.
4. Scale into Retirement
If you’re just getting started with retirement savings, you might seriously consider working a few years longer than you originally intended. This strategy dovetails with what we mentioned above about delaying the collection of Social Security benefits.
You might consider asking your employer to reduce your hours, so you can spend more years earning income. Or you can retire from your full-time job and find a part-time job for a few years.
With the growth of on-demand services and the gig economy, there are many ways to earn extra cash throughout retirement.
5. Enable Automated Transfers to a Savings Account
When it comes to retirement savings, it’s best to have several savings mechanisms in place to help you accumulate money. In other words, we don’t recommend putting all your eggs in one basket.
In addition to your 401k, consider opening a high-yield savings account and setting up automated transfers into your account. You can coordinate your transfers with your pay schedule to ensure that money is transferred as soon as it becomes available.
Some banks and credit unions offer customers the option to round up their transactions to the nearest dollar from their use of debit and credit cards and transfer those amounts into a savings account. Even small contributions can add up over time and earn interest.
6. Set Goals and Expectations
Before you determine how much you need for retirement, you should consider your vision of retirement. Do you want to travel the world? Do you want your mortgage to be paid off?
Whatever your financial goals are, it’s important to set those expectations so that you can plan for them accordingly. Having clear expectations is a good way for you to create a plan for retirement savings and increase the likelihood that you’ll meet your retirement savings goals.
7. Create a Practical Budget
While you’re continuously saving, we strongly recommend creating a practical budget that aligns with your savings goals. Without a budget, you may fall into the practice of spending more than you can afford or accumulating credit card debt, either of which can interfere with meeting your goals.
At the same time, you should review your monthly living expenses and look for opportunities to save. For example, you can see about refinancing your car at a lower interest rate. You can also determine items within your budget that are no longer necessary, such as large cable bills or subscriptions to magazine services. All these amounts can add up to a lot of money over time.
Any money you can carve out of your existing spending can be saved for your retirement. On a related note, your budget should accommodate paying down credit card debt if you have any.
8. Start a Side Hustle
A good side hustle can add thousands of dollars to your annual income and make it possible for you to ramp up your retirement savings without negatively impacting your lifestyle. Side hustles can take a wide array of forms.
Some people create a side hustle from a hobby or a skill they’ve acquired. For example, you might do woodworking in your spare time, drive an Uber, or start a handyman business to help people with repairs in their homes.
If you decide to start a side hustle, make sure to report your income to the IRS and use the income to invest for your retirement. You may be able to make pre-tax contributions in some cases, which is ideal if you don’t want to add to your tax burden.
9. Seek Professional Advice
Partnering with a financial advisor or a CPA can help you if you’re not sure where to start when it comes to catching up on retirement savings. A financial advisor can help you evaluate investments and decide on a strategy that accommodates your goals while taking your comfort with risk into consideration.
Catching up requires diversification of your portfolio to balance risk with financial security. Your advisor can help you create a budget and decide on the right savings and investment strategies to maximize your earnings and help you get to where you need to be.
FAQ About How to Catch Up on Retirement Savings
Here are some of our most frequently asked questions about catch-up retirement savings.
When Should I Start Saving for Retirement?
The simple answer to when to start saving for retirement is “as early as possible.” The earlier you begin saving, the more you can take advantage of compound interest. We recommend that everybody take advantage of employer-sponsored retirement plans such as 401(k) plans or IRAs as soon as they become eligible and max out annual contributions. Also, find out if your company offers an employer match to your contributions. You can potentially double your savings by participating.
If your employer doesn’t offer a retirement savings plan, then you should open a personal account, such as a traditional or Roth IRA, and contribute as much as you can.
What’s the Catch-Up Contribution Limit for Retirement Savings?
Retirement plans typically offer the opportunity for people over 50 to make extra annual contributions to catch up on their savings. Here are the catch-up contribution limits for 2022 and 2023:
- For 2022, the catch-up contribution limit for 401(k), 403(b), SARSEP, and governmental 457(b) plans is $6,500 per year. The amount will increase to $7,500 for 2023.
- For 2022, the catch-up contribution limit for SIMPLE IRA or SIMPLE 401(k) plans is $3,000. The amount will increase to $3,500 in 2023.
- For 2022, the maximum catch-up contribution for a traditional or Roth IRA is $1,000 and will remain the same for 2023.
Remember that contributions are only considered catch-up contributions if they are made in addition to the regular annual contribution limits. These are as follows:
- $20,500 for 401(k), 403(b), SARSEP, and 457(b) plans in 2022; $22,500 in 2023.
- $14,000 for SIMPLE plans in 2022; $15,500 in 2023
- $6,000 for traditional and Roth IRAS in 2022; $6,500 in 2023
Are There Any Withdrawal Restrictions When Catching Up on Retirement Savings?
There are no special withdrawal restrictions when catching up on retirement savings. You may begin to withdraw money at age 59 ½ without penalties.
There are recent legislative changes that have increased the age when you must begin taking mandatory withdrawals to 73 and reduced the penalties for early withdrawal. The new law has also allowed for exceptions when money is withdrawn to pay expenses related to an emergency or natural disaster. You can read the full details here.
Let CMP Help Create a Plan to Increase Your Retirement Savings
Saving for retirement doesn’t need to be complicated or stressful. Taking advantage of the catch-up retirement strategies we have listed here can help you get on track and ensure you have the income you need for a comfortable retirement.
Do you need professional guidance to catch up on retirement savings? CMP can help!