Saving for retirement is the kind of important-but-not-urgent task that can easily fall by the wayside. You know you should be saving a portion of your income every month toward retirement, but with so many competing needs for your income, it can be very tough to put savings at the top of your financial to-do list.
But neglecting your retirement savings will eventually catch up with you, and it will happen when you are at your most financially vulnerable. Rather than face an underfunded retirement because you didn’t save, become an aggressive saver who makes savvy investment choices now.
Here are the steps you need to take to give yourself a well-funded retirement, even if you’re behind.
Know your savings needs
The first step to retiring well is figuring out how much you’ll need in retirement. Start by looking up how much you have saved. (Don’t panic if the answer is somewhere closer to “pocket lint” than “$1 million.”)
From there, you can start plugging your information into a variety of retirement calculators. You can find such calculators in a number of places, including the American Association of Retired Persons (AARP) and insurance company Voya. These calculators can project your individual retirement goals and show you what it will take to get there, even when you are late to the process.
In addition to calculations of how much you will need in retirement and how much you’ll have to save each month to get there, you will also need to consider your current debt obligations, your current and future cost of living, and the effects of inflation over time. All of these factors can affect your savings rate and should be incorporated into your savings plans.
5 of the best ways to save for retirement when you’re behind
To get to a secure retirement, you need to have fully funded retirement accounts. Here are five ways to beef up your 401(k), IRA or other retirement accounts, even if you’re working to catch up.
1. Max out all your contribution limits
There are three different ways you can max out your contributions. First is to make sure you are contributing enough to receive your full company match in your 401(k). Many employers offer to match 401(k) contributions up to a certain amount. For instance, your company might offer to match 50% of your contributions up to 6%. This means that if you contribute 6% of your salary to your 401(k), your company will put in 3%, giving you 9% in total contributions. Taking advantage of this kind of company match is like getting free money toward your retirement savings.
Next, do your best to ensure you are contributing the maximum according to IRS guidelines. Your 401(k) plan and your Roth or traditional IRA have specific annual contribution limits. In 2019, the employee 401(k) contribution limit is $19,000 and the IRA contribution limit is $6,000 for those under 50.
Finally, if you are over the age of 50, make sure you’re taking advantage of the catch-up contribution limits. In 2019, savers over the age of 50 may put aside an additional $6,000 into their 401(k) for an annual total of $25,000, and an additional $1,000 into their Roth or traditional IRAs for a yearly total of $7,000.
2. Minimize your fees
Just as interest compounds over time, so do fees. For instance, Vanguard has calculated that if you invest $100,000 for 25 years and earn 6% per year, you’d have $430,000 by the end of your investment term. But if there’s a 2% annual fee on your account, the fees will compound as well and you’ll end up with only $260,000. That 2% fee will eat up nearly 40% of your account value.
So what can a 401(k) account holder do to minimize fees? First, remember that your employer is required to try to keep the fees in your 401(k) reasonable. However, you can reduce your fee through a change in your holdings within your 401(k). Moving from actively managed funds to index funds or ETFs will automatically reduce your fees, as those types of investments have lower costs because they do not need to pay a fund manager.
Just as you shouldn’t put all your eggs in one basket, you shouldn’t have all your retirement money in a single stock or asset class. For example, if you are solely invested in domestic automobile stocks, you would face a giant loss if American auto workers decide to go on an indefinite strike. But if domestic automobile stocks only represent a portion of your investments, then you will only see a small change in your overall investment portfolio balance in the event of an auto worker strike.
It’s much easier to diversify now than it used to be. Investing in index funds can provide you with automatic diversification because the funds are made up of a number of different asset classes. This will protect you from potential losses if any one sector has a downturn.
4. Invest for a long time horizon
The main difference between investors in their 20s and those in their 40s or 50s is the length of time available to invest. The young adult will not be retiring for 30 to 40 years, so there is sufficient time to allow compound interest to work as well as time to recover from market downturns. This is why younger investors often put their money in more aggressive stocks that offer higher potential returns at a higher level of possible risk.
But older investors should remember that they don’t have to stop investing the moment they retire. In fact, older investors can still plan on a 25- to 35-year investment horizon, because they will not need all of their money as soon as they retire. That means it’s entirely possible to invest in the higher-risk/higher-return types of investments even if you have already passed your 40th (or 50th) birthday. Just put a portion of your investments into these aggressive stocks and plan to hold off on shifting them to something more conservative until you’ve reached your 70s, 80s or beyond.
5. Delay retirement
For each year that you continue to work, you have one more year of earned income, one more year to make contributions to your retirement accounts, and one more year you can delay taking your Social Security benefits. Not only will this help you increase the size of your nest egg, it will also increase the amount of your Social Security benefits, because your benefit increases with each year you wait, up until age 70.
4 top ways to find extra money to invest
Of course, just knowing that you should be saving as much as possible for retirement doesn’t make it any easier to find the extra funds in your budget to do so. You don’t have to go searching for couch-cushion change to maximize your contributions. Here are four of the best ways to invest more.
1. Invest your extra income
You might be wondering, “What extra income?” But you could have more income than you realize.
Because of a cognitive bias known as mental accounting, you might treat things like your bonuses, tax refunds or even raises like “free money” instead of income. But each of these can be funneled into your retirement accounts to help you reach your annual contribution goals.
2. Automate your savings
You can’t miss money you don’t see. Automating your savings will allow your contributions to go directly to your retirement accounts without you having to decide to move it there. (That also means it’s a little more difficult to change your mind about what to do with the money if you suddenly decide to splurge on a big purchase instead.)
3. Cut your expenses
Reducing how much you spend each month can free up what you need to maximize your contributions. Cutting back could be as simple as cooking at home more often or as complex as downsizing your home or car.
4. Generate additional income
You could always earn more money, whether by offering your services as a consultant or freelancer, getting a second job, selling off your things in preparation for downsizing, or even by renting out a room in your home.
It may not be easy to financially prepare for retirement if you got a late start, but it is achievable. Start by determining how much you need to save, then get busy maximizing your contributions, minimizing your fees and making savvy investment and career choices. Even if you think there’s no more wiggle room in your budget, you can find extra money to invest by changing your mindset, automating your savings, making judicious cuts and generating extra income.