In an ideal world, you would have saved a good portion of your salary every year in a retirement account so you can retire early. Ah, the absolute bliss…
But in the real world, things are not always so rosy. If your age is nearing the mid-century mark and you’ve not saved enough for retirement, don’t panic. Of course, if you’re starting late, the mere challenge of saving enough money on time might seem incredibly daunting. But thankfully, you still have some options left to catch up quickly!
Don’t Go Anywhere Near High-interest Debt
Getting into debt is a costly mistake in most cases, which is why paying off any high-interest debts as soon as possible is one of the best ways to catch up on your retirement savings. Rather than spending money on paying off interest, these funds can be diverted to your retirement savings. Analyze your existing debts and update your budget to pay them all off. Start with debts that have the highest interest rates and gradually move on to debts with lower rates.
Fully Fund Your 401(k)
Consider funding your 401(k) offered at work to the maximum amount. Doing so can pave the way for a solid retirement, even if you start late. Increase contributions whenever you get a bonus or a raise.
For example, if you contribute $23,000 annually to a 401(k) plan, you can accumulate about $1.3 million in savings by the age of 67, assuming you start at the age of 40. While the calculations would of course vary depending on certain conditions, this strategy ensures that you will have a decent income to live on in your retirement.
Cut Down On Non-essential Expenses
Differentiate between your wants and needs and make sure that you reduce discretionary expenses whenever possible. If you don’t have a budget yet, it’s high time to create one to help you stay on track with your expenses. Having a budget also allows you to identify areas where you can cut back on spending so that the extra money can be funneled into your retirement savings.
Boost Your Income Potential
Before you retire, take proactive steps to increase your earnings. It would be a good time to take on a side hustle to supplement the earnings of your primary job. You can also explore a side hustle before you officially retire or take on part-time work during your early retirement.
Have Ambitious But Realistic Savings Goals
When you have a strong goal in mind, it can motivate you to take the required action to get there. It’s time to get ambitious and target a savings plan that is outside your comfort zone. Make sure that your goal is super specific – it should include how much you want to have in your retirement savings and by what age. Having a clear intention ensures that your efforts are more focused. Moreover, it will motivate you to cut down on discretionary expenses and gain the momentum to build towards your retirement fund more quickly. This would, of course, require a lot of discipline from your end, but it’s one of the most efficient ways to catch up on your retirement savings.
Look Into Your IRA Options
There are several IRA (Individual Retirement Account) options out there. A traditional IRA would be ideal, depending on your income and whether or not you or your spouse is eligible for a workplace retirement plan. The contributions to a traditional IRA would be tax-deductible, unless the investment earnings have the potential to grow tax-deferred until you withdraw funds during retirement.
A Roth IRA is funded with after-tax contributions. Once you turn 59½ years of age, any qualified distributions, including potential earnings, are federal income tax-free.
To get the best of both, explore both Traditional and Roth options and use them both to complement one another and get the best tax treatment based on your income levels over time.
Got Extra Cash? Save It
Consistently place any extra money you get towards your retirement savings. This additional money can include salary increases, bonuses, tax refunds, inheritance, and other sources. If you unexpectedly receive a large sum of money, immediately transfer it to your savings or retirement account to prevent the temptation of spending this money unnecessarily.
Consider Home Equity
A home can offer liquidity during retirement. You can consider borrowing against the equity in our house to fund living expenses. Many people have their wealth tied up in real estate, and this can be a great way to fund retirement. You can use a home equity line of credit when you need to, or you can downsize, sell, and live off the equity.
A reverse mortgage is also a good idea since lending institutions generally shorten repayment periods and increase repayment amounts for older people who borrow. At the same time, selling your primary home and moving to a smaller and less expensive house might also make more sense. But remember, this should only be done after careful consideration and market analysis.
Final Thoughts
As you age, you need to start thinking more seriously about the loved ones you will leave behind. If the worst happens, you need to ensure that they have the funds to cover unexpected costs. Life insurance is a critical tool that can give you peace of mind and financial stability, as it serves as an effective solution to support your family in the event of your death.
Everyone’s retirement journey is different, and the strategies taken towards saving for it could be different, too. If you are nearing retirement but haven’t done much planning for it, you are indeed at a bit of a disadvantage. But worry not – with a firm decision to save and invest coupled with efficient planning, the odds could turn in your favor.
Figuring out how to save for your retirement can be daunting, but it’s a vital step for your future. It’s a lifetime goal for many to enter retirement age with peace of mind and everything mapped out for them, but many people arrive unprepared. The tips mentioned above can help you make small changes and start saving so your retirement funds can slowly add up!
