Vawn Himmelsbach
·5 min read
The earlier you start saving for retirement, the better your chances of building a comfortable nest egg. But if you’ve waited until later in the game, it doesn’t necessarily mean you’ve missed the boat to a happy retirement.
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In a new report, the Milken Institute recommends that Americans start investing for their retirement at age 25. Saving $100 a week as of that tender age will, by the power of compounding, yield $1.1 million by age 65 (assuming a 7% annual rate of return). Waiting even 10 additional years, until age 35, to invest the same amount at the same frequency would cut the final sum by more than 70%, down to only $300,000, according to the report.
Despite the clear advantages of getting a head start on saving, the Transamerica Center’s 2023 retirement survey found that 42% of respondents agreed with the statement: “I prefer not to think about or concern myself with retirement investing until I get closer to my retirement date.”
If you’re an older American who has put off retirement planning but now find yourself concerned about your future, you might be wondering how you can catch up on your retirement savings. Truth is, the answer depends on your specific financial situation and retirement goals. But there are a few things you can do.
How much do you actually need to save?
Before forming a saving strategy, it’s good to have a goal in mind.
A retirement calculator or budgeting tool can help to estimate how much you’ll need in retirement. This should take various factors into consideration: Are you planning to age in place or downsize to a smaller home? Do you want to travel more in your golden years? Do you have medical costs or caregiver duties to consider? It may be worth consulting a financial adviser to help you through this process.
Once you have a better understanding of how much you’ll need to meet your retirement goals, these five tips can help you make up for lost saving time.
1. Eliminate debt
Saving for the future also means reducing debt in the present — it’s hard to save when you’re paying high interest rates on your loans. Many Americans will surely struggle in this way as the total household debt in the U.S. is now more than $17 trillion, including debt from credit cards, student loans, car loans, mortgages and home equity lines of credit, according to the Federal Reserve Bank of New York.
Consider the avalanche method (paying off the highest-interest debt first) or the snowball method (paying off the smallest debt first while making minimum payments on the larger debts, gaining momentum as you pay off each debt).
2. Maximize contributions
Make a commitment to maximizing your retirement contributions, especially if you’re part of an employer-matching program. This could mean cutting back somewhere else. The contribution limits for 401(k), 403(b), most 457 plans and the Thrift Savings Plan have increased to $22,500 for 2023 (from $20,500). In addition, if you’re 50 or older, the catch-up contribution has increased to $7,500. Putting more aside for the future could also help to reduce your current tax liability.
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3. Consider annuities
An annuity is an insurance product that sets you up with a guaranteed future income, either a lump sum payment or a series of payments at regular intervals. This requires you to make one or more contributions that will then earn interest, often on a tax-deferred basis, until the payments begin at an agreed-upon date. Annuities aren’t for everyone; they can come with a high upfront cost. Talk to your financial planner about whether it’s the right option for you.
4. Work longer
Deciding to work past age 65 means you’ll be able to contribute more to your retirement savings. You’ll also be able to wait longer to claim your social security benefit. While you can claim this benefit as early as age 62, your monthly benefit will be reduced by a certain percentage before your full retirement age. You could also look for ways to generate passive income, start a side hustle or get a part-time job that you enjoy.
5. Downsize
By selling your house and downsizing into a smaller home or condo, you can invest any profits into your retirement portfolio. You also might save money on utilities and maintenance, which could be funneled into your savings. You could also consider generating income from your current home, such as renting out the basem*nt.
If you waited well past the age of 25 to start saving for retirement, it’s still possible to build a nest egg — and following some of these tips could help you play catch-up.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
