Pay Off Your High Interest Debts
Paying off debt frees up all of your income to pay for current living expenses. Thats critical for retirees who havent had the time or income to save up big nest eggs. Retirees with a small nest egg may still have enough income to cover the basics and a few small luxuries provided their debts are paid off. If youve got a car note, lingering credit card debt, or unpaid IRS debt, or other high interest debt, try to pay it off before retirement.
The Retirement Budget Calculator’s Future View shows how paying off debt can keep a relatively modest nest egg in place for years.
Consider Adding An Ira
If you dont have a 401 plan available at workor if youre already funding yours to the maxanother retirement investing option is an individual retirement account or IRA. The maximum you can contribute to an IRA in 2021 and 2022 is $6,000, plus another $1,000 if youre 50 or older.
Individuals who turn 50 at the end of the calendar year can make their entire annual catch-up contributions for that year, even if your birthday falls at the end of the year.
IRAs come in two varieties: traditional and Roth. With a traditional IRA, the money you contribute is generally tax-deductible upfront. With a Roth IRA, you get your tax break at the other end in the form of tax-free withdrawals.
The two types also have different rules regarding contribution limits.
Maximize Retirement Account Contributions
Contributing the maximum amount possible to retirement accounts is one way to make your money to work in your favor. Not only can you receive a tax credit toward contributions to your IRA, 401 plan or 403 plan, but retirement accounts also have less risk compared with mutual funds or stocks. And they earn a higher rate of return than bank savings accounts.
Additionally, employers often match contributions to 401 plans, helping you earn more money in the long run. The most common employer match is 50 percent of the employees contribution, up to 6 percent of their salary. Ask your employer if the company offers a 401 match program and how much it will contribute.
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Retirement Planning For Late Starters
A recent retirement study found that only 33% of Indians are saving enough to fund a comfortable retired life1. Yet, with advancements in healthcare, life expectancy has increased. Hence, there is a need for funds for longer retirement years. But the absence of regular paychecks can make meeting your old age expenses challenging without a retirement plan.
If your retirement is no longer far off in the horizon, donât worry. You can still make up for the lost time. Hereâs a guideline to help you build enough corpus and enjoy financial freedom in your retirement.
Tips For Late Retirement Savers
Life Events
If you are nearing the age of retirement but find that you are not quite financially prepared, there is still time. Though you are going to have to change some living habits, here are a few tips to get you back on track.
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Saving In Your 40s And 50s: Its Never Too Late To Get Started
When saving for retirement, theres one question people ask themselves more than any other: Will I have enough money? Its a common question for a reason, and its one that has increased in magnitude lately especially for people in their 40s and 50s.
In a May 2013 study, the Pew Charitable Trusts found that during the recent recession, people born between 1966 and 1975 had suffered the most of all age groups, losing 45 percent of their wealth from 2007 to 2010. According to one report, Americans in this age bracket alone lost an average of $33,0001.
The feeling of frustration can be overwhelming. Youve been working hard for over 20 years. Youve been saving as much as you can. Then, the market crashes, and your savings disappear. Know that youre not alone and that its not too late to bounce back. Its also not too late to start. Even if youre 55 years old and decide that today is the day to begin saving in earnest, you still have time to build up income for retirement.
Don’t Take On More Risk
Some people make the mistake of taking on additional investment risk to make up for the lost time. The potential returns are higher: Rather than 7%, there’s a chance that your investments can grow by 10% or 12%.
But the risk, the potential for loss to your principal, is also much higher. Your risk should always be aligned with your age. People in their 20s can accept greater losses, since they have much more time in which to recover. People in their 40s can accept less risk, and people in their 50s still less.
Don’t accept extra risk in your portfolio. You might consider one of the following asset allocation formulas:
- Invest a percentage of 120 minus your age, in stock funds, with the rest going into bond funds. This represents a high but acceptable level of risk.
- Invest a percentage of 110, minus your age in stock funds, with the rest in bond funds. This comes with a more moderatelevel of risk.
- Invest a percentage equivalent to your age, in bond funds, with the rest going into stock funds. This is a more conservative level of risk.
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Fund Your 401 To The Max
If your workplace offers a 401or a similar plan, such as a 403 or 457and you arent already funding yours to the max, now is a good time to rev up your contributions. Not only are such plans an easy and automatic way to invest, but youll be able to defer paying taxes on that income until you withdraw it in retirement.
Because your 50s and early 60s are likely to be your peak earning years, you may also be in a higher marginal tax bracket now than you will be during retirement, meaning that youll face a smaller tax bill when that time comes. This applies, of course, to traditional 401s and tax-advantaged other plans. If your employer offers a Roth 401 and you choose it, youll pay taxes on the income now but be able to make tax-free withdrawals later.
The maximum amount you can contribute to your plan is adjusted each year to reflect inflation. In 2021, its $19,500 for anyone under age 50, rising to $20,500 in 2022. But once youre 50 or older you can make an additional catch-up contribution of $6,500 for a grand total of $26,000. If you have more than the maximum to sock away, either a traditional or Roth IRA could be a good option.
The Amazing Power Of Beginning Early
Who wants to be a millionaire?
For many people, having a million dollars might seem like being elected Presidenta worthy but unattainable goal.
But getting to a million might not be that hard if you know the secret: time.
If you give your savings enough time to grow, you’ll only need relatively small investments of moneymade consistentlyto wind up with a pretty big balance.
How much do you think you’d need to save each year in order to reach a goal of a million dollars? $20,000? $50,000?
In fact, if you save just under $4,500 per year over a 45-year career, you could have over $1 million by the time you retire. And if you have the opportunity to invest in a retirement plan that offers a matching contribution from your employer, your yearly investment could be as small as $2,200.
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Work As Long As Possible
The best solution to an inadequate nest egg is simply to keep working. This has numerous benefits.
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Work As Long As You Can
Gone are the days when folks retired at 60 or 62, says Sean Pearson, a CFP in Conshohocken, Pennsylvania. Some of his happiest clients work past 60 or 65 perhaps not in a high-stress, 40-to-50-hour-a week job but in something lower key. The SECURE Act of 2019 allows individuals with earned income to continue contributing to traditional IRAs even after turning 70 1/2. For every year you continue to earn income and save, that is one less year that your savings needs to pay for you in retirement, he says.
Patricia Amend has been a lifestyle writer and editor for 30 years. She was a staff writer at Inc. magazine a reporter at the Fidelity Publishing Group and a senior editor at Published Image, a financial education company that was acquired by Standard & Poor’s.
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Act Sooner Rather Than Later
When it comes to your retirement budget, the sooner you can act the better. Thinking of downsizing in retirement? Downsizing a few years earlier can free up money in your budget which you can contribute towards your 401 or IRA.
Trying to cut expenses? Taking action earlier can help you decide whether a streamlined budget is realistic for your lifestyle.
If you hope for a lifestyle business to cover some expenses during retirement, start building the business during your working years. You can use your primary income to cover startup costs, and you can start earning profits before you need to depend on the profits for your lifestyle.
Every step you take towards cutting expenses, and investing for the long run is a positive step. Taking those steps sooner can lead to compounding growth. Even with a late start, you can find a way to make your retirement budget work for you.
Whether you have a few decades or only a year or two until retirement, you can figure out a retirement budget that works for you. Take action today, to open up more options for the future.
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Be Creative About Income
One of the best ways to shore up a retirement budget is to work longer. By working until age 70, you can delay taking Social Security, increase the years you have to save and invest, and decrease the length of time youll draw from your nest egg.
Of course, not everyone wants to work until 70 years old, and many people arent able to. If you cant work full time, you may still be able to find ways to earn during retirement. If you enjoy skiing, maybe you can work as a ski patrol or teach skiing lessons. People hoping to travel abroad may earn money by teaching English lessons abroad.
You dont necessarily need to earn a full time income during retirement. If you can earn enough to supplement your Social Security Income, you can avoid touching your nest egg for several years. That gives your investments time to grow, so you can better support yourself during your later years.
More Certainty With Health Insurance
In writing this early retirement blog, rarely a week goes by that I dont get the question, How do you afford health insurance if youre not working? I share resources including a:
Invariably, the question comes back to, No, what are YOU doing about health insurance? I have to admit, I havent found a satisfactory solution for medical insurance that Im confident will work for the next 20+ years until we reach Medicare eligibility. Were winging it, planning one year at a time.
An early retiree must save tens to hundreds of thousands of dollars extra to be able to pay full unsubsidized insurance premiums until they reach Medicare eligibility. Alternatively, we could take on the political risk of relying on ACA subsidies.
Those with preexisting conditions must also take on the risk of financial ruin if they cant buy insurance at all if the law changes. All of these are reasonable possibilities for people bridging the gap between employer provided health insurance and Medicare in America.
Medicare is not free. Medicare is not perfect. But it provides certainty and stability for someone who is saving for retirement at a traditional age. Neither is available to someone working towards FIRE.
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Tax Advantages For Older Savers
Regardless of whether tax-deferred or Roth accounts make more sense for you, it is wise to put as much money into these tax advantaged retirement accounts as possible. This is true even if you want to retire early. But early retirees have to devise a strategy to create enough income to live in retirement without incurring early withdrawal penalties. Late savers who will retire at a standard retirement age dont face this challenge.
The IRS allows catch up contributions to be made by those age 50 or older. In 2020 and 2021, individual contribution limits to 401, 403, and 457 accounts are $19,500. The catch up contribution for those 50 and older is an additional $6,500 for a total contribution limit of $26,000 per person.
Traditional and Roth IRA contributions limits are $6,000 per person. The catch up contribution for those 50 and older is an additional $1,000, for a total limit of $7,000 per person.
Individuals who can max out contributions to both work and personal retirement accounts can contribute $7,500 per year more than younger individuals. Households with married couples could potentially contribute up to $15,000 more than younger couples. This is a massive advantage to those who are starting to save for retirement late.
Invest As Aggressively As You Can
Investing aggressively generally means going heavy on stocks, and that can be a dangerous thing to do when you’re right on the cusp of retirement. But if you still have at least 10 years to go until you plan to end your career, then stocks are a good bet for your retirement plan. Say you’re 55 and are able to start socking away $500 a month in an IRA or workplace retirement plan. If you invest largely in stocks, you might easily see a 7% average annual return in your account — that’s several percentage points below the market’s average. If your target retirement age is 67 — that’d be your full retirement age for Social Security purposes — then you could end up with $107,000 in savings by the time you get there.
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Know It Is Never Too Late
Many people who did not start saving when they were younger ignore the situation thinking that it is now too late to get started.
This is not true.
While it certainly may be more of a challenge to save all the funds you will need, it can still be done.
Ive had many people contact me in their 50s and, some well into their 60s, that have realized that they havent saved nearly enough. They fear that they will never be able to retire.
Im quick to encourage them that retirement can become a reality, but they have to make changes immediately. They also have to realize that an early retirement is not a reality. Theyll have to work work well into their late 60s and maybe 70s to make up for the shortfall.
Look At Money Saving Options
If you are getting a late start at saving you may struggle to save the amount you need to each month. Here are some tips that might be helpful.
- Look at ways to make some extra money. Do you have a hobby or interest that you could turn into a part time job or do you have a skill that others are looking for. Be creative and see what you can come up with.
- Can you downsize? Look at your current living situation and determine whether or not you might be able to downsize. If you have kids who are now older and moved out, you may not need to stay in such a large home.
- Do you have large ticket items that you no longer need or use? If for example you have a boat, a camper or other big ticket item that is not being used, now may be a good time to sell. Take the money and invest it in your retirement account.
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