How to Catch Up When You’re Behind on Saving for Retirement
If you’re worried that you haven’t saved enough for retirement, then you’re not alone. Nearly half of American families have no retirement savings to speak of. It really is easy to get sidetracked. The immediate needs of raising a family may seem to take precedence over funding a future retirement. However, that retirement will come sooner than you think.
If you’re behind on your savings, here are six steps to help catch up.
1. Estimate How Much You Will Need
To understand how much you should be saving toward retirement, you need to know how much you will be spending in retirement. We recommend that you talk with a financial planner with an expertise in retirement planning to get numbers based on your specific situation. However, if that isn’t feasible, then this Wall Street Journal article provides a reasonable DIY approach.
Essentially, you estimate the amount of money you will spend in retirement (the article uses the popular baseline of 80% of what you are earning now). You then deduct Social Security and pension benefits from the amount you will spend. This is the annual amount that you will need to withdraw from your savings.
Next, you use the 4% withdrawal rate rule to determine the amount you will need to have saved by the time you retire. Keep in mind that this rule is meant to insulate your money against the effects of inflation, but it is no guarantee of protection. However, assuming you follow the 4% rate, then you multiply the amount you will need to withdraw by 25 (the inverse of 4%).
The total is how much you should have saved. The next step is to determine how much you are short and determine ways you can catch up. We offer ideas in the following steps.
2. Get Out of Debt
Debt can hamper your ability to catch up and rob your peace of mind. Make a plan to pay off your highest-interest accounts first, then tackle the rest of your debt. Try to stay out of debt by asking yourself hard questions about your spending. For example, do you really need a brand-new car from the dealership (and the corresponding loan) when you can get a perfectly good used car for thousands less?
3. Do the Max
Many companies will match your retirement account contributions up to a certain amount. If you’re not contributing enough to get a full match, then you are throwing away free money—money that could help you reach your savings goal.
If you are able, then consider contributing the maximum amount that the IRS allows. For example, you can contribute up to $18,500 to a 401(k) in 2018 and $19,000 in 2019. If you are 50 or over, you can contribute an additional $6,000.
4. Open a Roth
Open and contribute the maximum to a Roth IRA. Your contributions will grow tax-free, and your withdrawals will generally be tax-free, a fact that can help you manage taxes in retirement. For 2018, you can contribute up to $5,500, with a $1,000 catch-up contribution if you are age 50 or older. In 2019, you can contribute up to $6,000. Keep in mind that you may not be able to contribute to a Roth if your income exceeds the income ceiling; however, you may be able to take advantage of a “backdoor” Roth conversion. We recommend that you talk with a financial advisor to see if a conversion would be the right strategy for you.
5. Increase Your Income
Increasing your income can serve a dual purpose: It may help increase the amount of Social Security you receive, and you can commit the increased income toward your savings. If a raise isn’t in your future, you might consider whether you should pursue a higher-paying job, work additional hours, or get part-time work with a second job.
6. Delay
Retiring later can give you the opportunity to save even more. While you are considering postponing retirement, also consider postponing Social Security. Many people take their benefits at age 62, when they’re first eligible, but they’ll receive a reduced amount. For each year you wait up until age 70, your Social Security benefits will increase. You can read more on the Social Security Administration’s website.
Summary
Realizing that you’re behind on your retirement savings may be dismaying, but take heart: By taking action now, you can put yourself in a better position to retire with confidence that you will be OK. These steps can give you a good starting point; however, if you want personalized advice, we encourage you to reach out to us.