September 14, 2021
In 2020, only 15% of full-time American workers in the private sector had access to a defined benefit plan, which shows pensions are all but extinct. The Social Security system is also increasingly unreliable, leaving it up to many of us to fund our own retirements.
Unfortunately, it can be challenging to set aside as much money for the future as we probably should. Delaying gratification can be difficult and wage growth has arguably been stagnant for years. As a result, a whopping 52% of workers feel behind on their progress toward retirement savings.
If you count yourself among them, don’t worry. This guide will show you how to catch up on retirement savings, even if you’re currently concerned it’s too late.
If you’re not entirely sure whether you’re on track for retirement or wondering “when can I retire?,” you’re not alone.
According to the Bankrate survey referenced above, 20% of workers don’t know where they stand with their retirement plan right now. That’s pretty understandable, considering there’s a lot of potentially conflicting advice on the topic:
Fidelity Investments says you should use metrics based on your income, i.e. having six times your salary saved by age 50
The widely-touted Four Percent Rule states you should save 25 times your annual spending to retire. You might set a goal to have half of that saved by 50
These benchmarks can be helpful, but they’re also just rules of thumb. They don’t apply to everyone, so don’t panic if you don’t measure up to one right now.
The best way to gauge where you stand is to estimate how much money you need to retire, make a concrete plan to get there and check your progress against it as best you can.
If you know your retirement number and think you’re not on track, try some of the strategies below.
If you work for a company that matches a portion of your retirement contributions, it’s wise to invest enough to get the maximum amount. Typically, these contributions take priority over other investment activities, since their effective return is far higher than what you could reliably receive elsewhere.
For example, imagine you earn $70,000 a year and your company matches 50% of your contributions up to 6% of your salary. The first $8,400 you contribute would earn an automatic 50% return, since your boss would give you another $4,200 just for putting it into the retirement account.
For context, the S&P 500 Index returned an average of 16.34% in the last decade, and that includes one of the longest bull runs in history.
That $4,200 boost would add up quickly, even if you start at age 50. At a 7% annual return, those contributions would amount to an extra $112,158 by the time you turn 65, thanks to compound interest.
It’s normal for people nearing retirement age to have some retirement catch up to do. In fact, it’s so common that the IRS increases some retirement account contribution limits for people in their 50s.
For example, 401(k)s and Independent Retirement Accounts (IRAs) have annual contribution limits of $19,500 and $6,000, respectively. However, if you turn 50 before the end of the calendar year, you can contribute an additional $6,500 to your 401(k) and an extra $1,000 to your IRA.
Assuming you turn 50 and immediately start taking advantage of the entire $7,500 increase, you’d generate an extra $200,282 over the next 15 years (with 7% returns).
401(k)s and IRAs provide two tax benefits:
They shelter either your contributions or your withdrawals from taxes, depending on whether the account is Roth or traditional (but not both).
They shelter your asset returns from taxes while invested in the account.
A health savings account (HSA) does one better. It shelters your contributions, asset returns and withdrawals from taxes, as long as you spend the money on qualified medical expenses.
If your company makes your contributions through payroll, they’ll even be exempt from FICA taxes, which is another privilege 401(k)s don’t offer.
The HSA contribution limit for someone with individual coverage is $3,600, and there’s a $1,000 catch-up contribution after age 55.
There are limitations around who can have or qualify for an HSA; for further information contact your HSA advisor or administrator.
HSA contributions don’t require earned income like other retirement accounts, so you can put money into one after retiring. However, you’ll have to do so before you turn 65.
Once you become eligible for Medicare, you can no longer contribute to an HSA. That makes HSA accounts especially attractive to people who retire early.
While these tricks can help you play some retirement catch up, there’s no substitute for improving the fundamentals of your finances. That means:
Increasing your income. Consider creating a second income stream doing some work you enjoy doing. A side hustle during retirement can make up for a lot of missed savings. A 4% withdrawal rate means $4,000 of side hustle income is worth $100,000 in savings.
Decreasing your expenses. Cutting your spending means saving more now and needing less to support yourself in retirement. Consider downsizing your house or moving to a city with a lower cost of living once any children have moved out.
Optimizing your investment returns. You can make your money work for you by being efficient about how you save it. It’s wise not to let it sit in a bank account where it loses value to inflation or in an old investment account with a high expense ratio.
Above all, do whatever you can to maximize your savings rate. Even if you’re getting a late start, a high enough savings rate can help you play some serious retirement catch up.
With a 66% savings rate, you could retire in a little over ten years, assuming a 5% return on your investments and a 4% withdrawal rate. That means, even if you start saving from scratch in your fifties, you could still retire at a standard retirement age.
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