If you regret not starting to save for retirement early enough, you’re not alone. According to a recent U.S.News article, 22% of Americans feel the same way. While a late start to saving can threaten a secure retirement, it doesn’t necessarily mean you don’t stand a chance. Instead of focusing on your past mistakes, it’s time to buckle down and focus on the future.
Let’s say you are 50 years old and just starting to save for retirement. Don’t fret yet. With today’s life expectancies, in theory you have a 30-year investment horizon. The key is to make a plan and stick with it. Here are a few other considerations to keep in mind when time is of the essence.
Contribute more. Making catch-up contributions to your retirement accounts can go a long way.
“The catch-up contribution rules for individual retirement accounts, 401(k)s, 403(b)s and similar accounts, can be a fantastic way for those age 50 and older to accelerate the pace of their retirement savings,” said Neel Shah, a financial advisor at Beacon Wealth Solutions in Monroe Township, New Jersey.
Currently, people 50 years old and older can contribute an additional $6,000 to a 401(k) or an extra $1,000 to an IRA. These contribution also offer tax advantages. If unable to max out multiple retirement accounts, it is recommended to start with your employer’s plan first. Also, because of the higher contribution limits, a 401(k) takes priority over an IRA, and many employers also offer matching contributions. Favoring your 401(k) is definitely a smart choice.
Downsize spending. Cutting back on expenses is a great way to afford more retirement funds for late savers. Consider moving into a smaller house to reduce housing expenses if possible. Review your budget for unnecessary spending, and make paying down debt a priority. As you reduce your spending, think about what your budget may look like in retirement. For example, health care could be more expensive in retirement as you switch from an employer’s health insurance plan to Medicare. A health savings account could be a great option to help you plan for those costs now. You can open an HSA if you’re enrolled in a high-deductible health plan, and the money saved is tax-deductible with tax-free withdrawals when used for health care expenses. Starting at age 65, you can withdraw HSA funds for any purpose without a penalty.
Manage risk. It may be tempting to take bigger risks with investments when you’re behind on saving, but be cautious. This strategy has the potential to backfire. The older you are, the less likely you are to recover from major portfolio losses. Losses that could be catastrophic to someone who started saving late. Using principal-protected alternatives, like certificates of deposit, cash value life insurance and annuities can help you realize gains without risking savings. While stocks tend to outperform fixed-income investments, they are more susceptible to volatility. Someone who begins saving in their 50s could still use a strategy that includes riskier investments to yield a decent rate of return, but as they grow older, transitioning to a more conservative plan is wise.
Be flexible. As you move closer to retirement, be prepared to make changes to your plans. If you’ve put saving off, you might need to accept the fact that you may need to work longer. Phasing into retirement with part-time work may also be a great strategy. Not only do you continue to bring in income, you may also be able to postpone Social Security, resulting in a higher benefit amount. Speed bumps are inevitable, so be sure to keep your eye on the prize and stick to your plan. You may not have the desired funds saved up today, but by staying motivated and committed, you significantly increase your chances of success in the future.
Written by Rachel Summit
