How to Catch Up on Retirement Savings
Updated: May 26, 2022
Despite its importance, saving for retirement is not always easy. Even if you save a portion of your salary each year for retirement, there is more that can be done. You may find yourself feeling behind and needing to catch up to achieve your retirement goals, as do 52 percent of American workers.
The first tip is to pay off any high-interest debt as soon as possible. Money going to interest can be diverted to retirement savings. This money will then begin to earn compounded interest, which will grow your savings. Keep track of your existing debt and have a goal of paying it off in your budget.
Another important step to take is to reduce discretionary expenses. Create a budget to help track expenses and prioritize specific areas of your budget. Review your total spending to see how you are really spending versus how you think you are spending. Create a specific savings goal (how much, when) to hold yourself accountable. Consult a financial advisor to help with specifics to best achieve your goals.
Save extra cash and make more. This could be tax refunds, inheritances, salary increases, and bonuses. Moving this money directly into your savings account will help fight your temptation to spend it immediately. If you are able, you can also increase your earning potential. Before preparing for retirement, some people consider taking on side jobs or take part-time jobs in early retirement to help supplement primary earnings.
You may also want to consider your various retirement account options and associated benefits. Each vehicle is different and the one you choose should best complement your goals. If you have a matching contribution from your employer, it probably makes sense to maximize it and depending on your retirement strategy and your tax bracket, it may make sense to exceed the match. The annual contribution limit for 401(k)s is $19,500 a year for 2021. If you are a are small business owner or self-employed, you can set up your own plans. You may want to consider a Roth 401(k) as money is grown on a tax-deferred basis and withdrawals are tax free under most circumstances, but there are limitations based on certain factors such as modified adjusted gross income.
It is important to understand all the rules of your retirement benefits. You can check with the Social Security Administration to learn how your retirement start date impacts your benefits. If you are able, you can retire later to give yourself more time to save. According to Discover, the longer you wait to start drawing benefits prior to age 70, the larger your monthly benefit will be. You should also understand your deductions. Consider meeting with a CPA to review your information and determine whether itemization is appropriate. This will help you best take advantage of your savings.
For both Traditional and Roth IRA accounts, you can make catch up IRA contributions if you and your spouse are both age 50 or above. You may be able to contribute up to $1,000 more to your accounts if this is the case. For 401(k)s, 403(b)s and 457s, you can save as much as $6,500 extra in your defined plan. For those with a Savings Incentive Match Plan for Employees individual retirement account or a SIMPLE 401(k), the catch-up contribution is $3,000 annually. There is also something called Saver’s Credit for some low-to-moderate income families. This provides a match to a portion of your IRA or employer-sponsored retirement plan.
Other savings tips include utilizing investment portfolios, real estate, and disability insurance. First off, you can adjust your stock portfolio. It is important to be aware of fees and the performance of the funds during the selection process. Many mutual fund companies also offer dividend growth and income mutual funds. With real estate, homes and properties can provide liquidity during retirement. Older individuals could consider borrowing against the equity in their homes to help with living expenses. Home equity lines can be used to draw from when needed. Alternatively, you can sell, downsize, and live off the equity. You can also consider looking into a reverse mortgage as lenders may shorten repayment periods and increase amounts for older borrowers. However, it is important to try to obtain the largest amount possible from a sale and not rush into things. Keeping an eye on the market and considering tax consequences can be beneficial as well. Lastly, don’t brush off disability insurance. While you may think disability is unlikely, preparing for the worst-case scenario will make all the difference financially if the event were to occur.
There are many solutions available to catch up on retirement savings. The most important point is to be proactive about retirement early on. Understand your finances and future plans, and meet with a financial advisor to best prepare for your future.