FINANCE
Saving for Retirement: How to Catch Up If You’re Behind
EXPECTED READ TIME: 6 MINUTES
Behind on saving for retirement? If so, you’re like millions of Americans who may have been focused on family, medical, emergency, and other life expenditures and are just now starting to get serious about retirement. But don’t sweat or fret — instead, do a reset on your saving and investing strategies. Read on for advice to get your retirement savings on track.
How Much Money Should You Have Saved for Retirement?
First figure out if you need to catch up by looking at how much, if any, you’ve already saved, as well as when you plan on retiring.
A general rule of thumb is to have 10 times your income saved by age 67. Once you figure that number, all you have to do is pick a retirement date, and adjust your current retirement savings target.
You can use a basic retirement calculator to get a better estimate of how much that factors in your desired yearly income in retirement, along with other variables. If you don’t know what percentage to use for returns, you can consult your retirement plan’s prospectus.
Don’t put off saving for retirement or increasing your contributions any longer — start today.
Start Saving — or Saving More — Today
Whichever strategies you choose, don’t put off saving for retirement or increasing your contributions any longer — start today. Even if all you do is open a savings account designated for retirement funds and deposit whatever little money you can spare each month, that’s a motivating first step.
Then put together a budget and set aside as more and more for retirement savings and investments as you go. If you have a lump sum that you don’t need for other monthly expenses, you can seed it your retirement account.
Even if all you do is open a savings account designated for retirement funds, that’s a motivating first step.
12 Ways to Catch Up on Retirement Savings
1. Take Advantage of “Free” Money From Employer Matches
If your workplace offers a retirement plan with an employer match, opt into the plan during the next open enrollment period. Then maximize your contribution to take advantage of the match.
For example, if your employer matches up to 4% of your yearly salary, make sure that you contribute at least 4% of your salary, if your budget allows. If you don’t, you’ll be missing out on “free money” that you wouldn’t have gotten elsewhere. Additionally, if you make pre-tax contributions to the plan, you may reduce your taxable income.
If your employer matches up to 4% of your yearly salary, make sure that you contribute at least 4% of your salary.
2. Increase Your Existing Plan Contributions
If you currently contribute 10% to a retirement plan, bump it up to 12% or 15%. Then keep increasing the percentage gradually by 2 to 5 percentage points until you are contributing the yearly maximum.
3. Open a Solo 401(k)
If you own your own business — and have no employees other than perhaps your spouse — consider opening up a solo 401(k), which will have generous contribution limits.
That’s because you’re both the employer and the employee, so you get to contribute the maximum allowable for an employee and then match up to 25% of it as the employer. Since all of the funds go to you when you retire, there is no downside to contributing the maximum, as long as the plan is well-managed.
Since all of the funds go to you when you retire, there is no downside to contributing the maximum.
4. Open an Individual Retirement Account (IRA)
An IRA can help you save in addition to an employer retirement plan, or it can be a principal retirement option if you are self-employed. You can choose a self-directed account — which gives you a lot of flexibility in selecting your investments — or leave it up to the professionals with a managed account.
Traditional IRA
In a traditional IRA, you deposit pre-tax money, and the amount that you contribute is subtracted from your taxable income. This may be the best type for you if you expect to be in a lower tax bracket when you retire, and if you don’t foresee needing access to your contributions before retirement.
Roth IRA
If you meet certain income limits, you may want to invest in a Roth IRA, which offers more flexibility. You can withdraw your contributions (but not the earnings) without incurring a penalty. Your Roth IRA earnings are tax-free, and qualified distributions are tax-free.
SEP-IRA
A Simplified Employee Pension (SEP) IRA (SEP-IRA) may be ideal if you are self-employed. You can make annual tax-free contributions up to limits set by the IRS.
A Simplified Employee Pension (SEP) IRA (SEP-IRA) may be ideal if you are self-employed.
5. Don’t Cash Out! Keep Investing Funds From Older Accounts
Avoid the temptation to cash out money from previous jobs. If you do so before you retire, you will incur penalties. If the older plan is well-managed, and you have the option, you can leave the funds intact.
As long as you monitor the plan on a somewhat regular basis, this could be a great option for you if you’re an “out of sight, out of mind” type of person who is more likely to leave the money alone to grow on its own if it is not front and center.
Consolidating the money into your new employer’s plan is a great if you operate better with your money in fewer accounts.
Consolidating the money into your new employer’s plan is a great if you operate better with your money in fewer accounts.
6. Take Advantage of Catch-Up Contributions After You Turn 50
Don’t miss out on higher contribution limits as you get older. Once you turn 50, you’re allowed to “catch up” on your annual retirement contributions to both IRAs and employer retirement plans.
Catch-up contribution limits may change when new tax laws are implemented, but they usually increase rather than decrease, which means more opportunity to save.
Once you turn 50, you’re allowed to “catch up” on your annual retirement contributions.
7. Actively Manage Your Retirement Portfolio
Study employer-provided plan summaries and changes, and regularly monitor individual accounts. Keep on top of retirement plan performance, and make adjustments to your distributions to make sure that you’re meeting your retirement goals.
8. Open a Health Savings Account (HSA)
If you know that you or your dependent(s) will have medical expenses not covered by health insurance, you can contribute pre-tax earnings to an HSA if you have an eligible health plan.
Use your HSA to pay for qualified medical expenses, then contribute the tax savings to your retirement fund.
You can use your HSA to pay for qualified medical expenses, then contribute the tax savings (the amount of tax you don’t have to pay on the earnings) to your retirement fund.
If your employer contributes some funds to employee HSAs, that’s even more incentive to open one up — more “free” money!
Any money in your HSA at the end of the year is rolled over to the next year. Once you reach the age of 65, you can withdraw any remaining money from the HSA as you would from a traditional IRA — taxed at your retirement income level, but without additional penalties.
9. Cancel Unused and Underused Subscriptions, and Divert the Funds
If you have subscriptions to software products, streaming services, magazines, or other products and services that go unused, cancel them. Then increase your monthly retirement contribution by the amount of subscription fees.
10. Use Spring Cleaning to Boost Your Retirement Savings
Periodically clean out your home and property, and then hold a rummage or online sale to bring in some extra cash in exchange for items that you no longer (or never) use.
This can also give you a chance to get organized so that you avoid buying duplicates of items that have gotten lost in the rubble. Invest clean-out savings and yard sale earnings in your retirement account.
Invest clean-out savings and yard sale earnings in your retirement account.
11. Start a Side Business
If you have a skill that is underutilized in your current job, or a hobby that has earning potential, consider starting a side business. Direct as much of your side earnings as possible into retirement accounts, up to allowable limits.
If it’s something you really enjoy, you may even end up continuing the business part time after you retire from your full-time job.
Direct as much of your side earnings as possible into retirement accounts.
12. Take Advantage of the Saver’s Tax Credit
If you meet the program’s income limits, you may be eligible for the Retirement Savings Contributions Credit. This allows you to take a tax credit for making contributions to your IRA or employer-sponsored retirement plan.
The Takeaway
If you’re behind on your retirement savings, there are several ways to catch up. Take advantage of all of the opportunities out there — from “free” money and smart investment products to bringing home or holding onto more money — and you’ll be on your way to a healthier financial future.
Ready to Build Your Retirement Strategy?
Schedule a meeting with a financial advisor through PenFed Wealth Management.
