5 simple ways to catch up on your retirement savings
Most financial advisers agree: The simplest way to ensure you retire comfortably is to start saving early and let the power of compound interest work for you over time.
But what happens if you’re getting a late start on retirement, or financial troubles in middle age have eaten into your nest egg?
If this sounds like you, you’re not alone. A survey from finance website Bankrate.com found that more than one-third of Americans don’t have a penny saved for retirement, including more than a quarter of those ages 50 to 64.
While it’s admittedly not ideal to be behind on your retirement plans, the good news is that catching up isn’t complicated. It just involves cutting back on discretionary spending and staying disciplined as you look to build your nest egg in a shortened period of time.
Easier said than done, yes. But consider that if you save and invest $15,000 annually for 15 years at a 7% rate of return, you’ll wind up with a nest egg of more than $400,000. That means even from a flat start at age 50, you can retire with a decent chunk of change.
That’s presuming, of course, you put your mind to it and take the necessary steps across those final years of your working life.
If you’re just now realizing how far behind you are on saving for retirement, here are five key ways to catch up relatively quickly and effectively:
• Focus on debt. Making sure you save more is wise, but it’s crucial also to remember that any debts you take into retirement will mean continued strain on your budget, says Travis Sollinger, director of financial planning at Fort Pitt Capital Group in Pittsburgh. “Having no or little long-term debt can help keep monthly expenses low,” Sollinger says. “Make sure you have the house paid off, and keep automobiles longer.”
• Max out tax-deferred accounts. A straightforward way to catch up on retirement savings is to take full advantage of an IRA and 401(k), says Greg McBride, chief financial analyst at consumer finance portal Bankrate.com. The limit for 401(k) contributions is currently $18,000, with Americans 50 and older allowed to contribute an extra $6,000 annually; the limit for IRA contributions is currently $5,500, with those 50 and older allowed an extra $1,000 annually. “Paying yourself first” by taking money directly out of your paycheck ensures the money is saved, McBride says, and takes a lot of guesswork out of retirement planning.
Drowning in bank statements, etc.? Here's what you can toss
• Reduce advisory fees. If you are playing catch-up on retirement investing, you can’t afford to spend a penny more on fees than you have to, says David Fabian, managing partner and chief operations officer of FMD Capital Management. “Choose low-cost index mutual funds or ETFs over high-fee annuities or actively managed funds,” Fabian says. “The drag from excessive fees can quickly eat into your returns and stymie your progress.” For context, a 2015 fee study by mutual fund research firm Morningstar estimated that the expense ratio across all mutual funds was about 0.64%, or $64 per year on every $10,000 invested.
Don't let investment fees suck away your savings
• Work longer. While it’s not ideal, a powerful way to catch up is simply to work longer. “You’re really burning the candle at both ends when you retire too early because you’re drawing down your nest egg for expenses instead of contributing and growing that money over time in your investment account,” McBride says. Besides, some Americans work later in life out of a desire to stay active, not necessarily financial need. For instance, a 2014 survey from Merrill Lynch found that 80% of those employed in their golden years said “I work in retirement because I want to” instead of “I work in retirement because I have to.”
• Don’t fall for shortcuts. Fabian says it’s important not to panic, making risky bets on overly aggressive investments or putting all your eggs in one basket because you think you have found a sure thing. All portfolios should have “multiple asset classes, like stocks, bonds and cash, to reduce portfolio volatility,” he says. “This will create greater overall diversification and put in place the necessary components you will need to ultimately transition to an income plan in retirement.”
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor's Guide to Finding Great Stocks.