If you’re behind on your retirement savings, you are far from alone. As of 2019, nearly two-thirds of Americans in their 40s had less than $100,000 saved for retirement. Likewise, more than half of Americans in their 50s still had less than $100,000 in retirement accounts.
Maybe you’re a lifelong procrastinator. Or maybe you’ve been planning to buckle down on retirement savings at some unknown future date, but haven’t gotten around to it yet. Whatever your reason for being behind, you’re now wondering how to make up for lost time saving for retirement.
I want to encourage you to start taking steps to catch up on retirement savings today. It’s never too late to start saving, but you’ll have an easier time reaching your goals the sooner you begin thanks to the power of compound interest.
Although it may not be easy, there are ways to rapidly build a nest egg and increase your chances of retiring comfortably when you want to. Here are 6 brilliant strategies you can use to catch up on retirement savings.
1. Max Out Your 401(k), IRA, and HSA Contributions
This strategy may be the hardest to implement, but it’s perhaps the most crucial choice you can make to have your best chance at reaching a comfortable retirement. Maxing out your retirement accounts – and a Health Savings Account (HSA) if you have one – is the fastest way to grow your nest egg.
In 2021, you can contribute up to $19,500 a year to your employer-sponsored 401(k) plan. If you’re over age 50 and the Plan allows, you can make an additional $6,000 catch-up contribution each year. These limits may go up in the future to account for increased cost-of-living expenses.
You can also make contributions to a separate traditional or Roth IRA in addition to your company-sponsored retirement plan. The contribution limits for IRAs in 2021 are $6,000 per year, plus an additional $1,000 per year if you’re over age 50. If you have a pre-tax company-sponsored retirement plan, you might consider opening a Roth IRA in lieu of a traditional IRA to diversify the tax implications on your retirement assets.
And if you have access to an HSA, you can contribute up to $3,600 for an account with self-only coverage or $7,200 for an account with family coverage. HSAs also allow for $1,000 catch-up contributions for individuals over 55. HSAs can be good retirement vehicles because they’re triple-tax-advantaged.
The money you contribute is deducted from taxable income, earned interest grows tax-free, and withdrawals are tax-free if the funds are used to pay for qualified healthcare costs. If you don’t end up using the money for medical expenses, the account can act as an extra retirement asset. (Withdrawals not used for healthcare costs will be taxed at your normal income tax rate.)
2. Pay Off High-Interest Debt
Weighing debt-payoff strategies with investing extra cash for retirement can be a tough balance to achieve. When you’re trying to ramp up your retirement savings but you still have hefty debt balances, you may struggle to decide which concern you should pay attention to first.
Everyone’s situation is different, so it’s impossible to make a recommendation without understanding your unique circumstances. With that being said, paying off high-interest debt now can be a good strategy that allows you to save on interest charges and then reallocate those savings into retirement savings once the debt is gone.
If you have debt with very low interest rates, it might be better to channel extra cash into retirement investments, as those balances have the potential to earn interest (and then those interest earnings can earn more interest). But again, concrete recommendations cannot be made without a comprehensive review of your situation.
3. Reduce Unnecessary Expenses
In order to implement either or both of the above strategies, you may need to reduce your unnecessary expenses. If you were planning to cut back on your cost-of-living expenses in retirement anyway, this strategy is good practice while you’re still in the earning phase of life.
Unnecessary expenses – also known as discretionary expenses – can be classified as lifestyle “wants” instead of “needs.” You may need to create a budget to get a full understanding of how much money you’re spending on “wants” each month so you can strategize ways to cut back. You might be surprised how much money you can save by implementing small, relatively painless changes to your current spending habits.
4. Engage in Tax Planning
If you’ve been taking the standard deduction on your tax return without looking closer at your tax situation, you could be missing out on significant savings that will help you save more for retirement. For example, if you’re paying large amounts of mortgage interest or student loan interest, are making substantial charitable contributions, or have business-related expenses that your company doesn’t reimburse, it may make more sense to itemize your deductions.
Even though the Tax Cuts and Jobs Act significantly increased the standard deduction for both individuals and joint filers, a financial advisor or CPA can help you implement strategies such as bunching to take advantage of itemized deductions over the years. If you’re trying to catch up on retirement savings, a conversation with a tax professional may be worth your time.
5. Increase Your Income
Cutting down your expenses is the quickest way to start saving more for retirement, but increasing your income can reduce the need to slash your budget or simply boost your savings rate even higher. The easiest way to increase your income is to negotiate a raise with your current employer.
If that’s not a possibility, you might consider a side hustle instead. A side hustle could mean starting your own business or taking on a part-time job in addition to your primary career. Many people start their own businesses during their working years and enjoy the business so much that they continue it in retirement, further adding to their financial security.
6. Downsize or Relocate
Finally, downsizing your living situation or relocating to a less expensive area is another great way to decrease your expenses before retirement and funnel more money into your nest egg. As your children leave for college or start their own careers, downsizing is a natural next step for many empty nesters.
When you downsize before retiring to save money, you’ll also be able to plan for decreased living expenses during retirement. This may mean that you don’t have to save quite as much as you thought you would. The extra money from a home sale can be invested in the markets or used as a full-cash payment on a smaller home so you have no mortgage to worry about.
Work With Caviness Wealth Management to Make Up for Lost Time
As we’ve said multiple times throughout this article, it’s impossible to make specific recommendations without understanding your unique circumstances. And the truth is, these strategies may not work for everyone, nor are they the only strategies available. But you need help making up for lost time on your retirement savings.
At Caviness Wealth Management, we want to help you plan for your financial future no matter where you are in the process. To see if I can help you discover the right catch-up strategies for your situation, click here to schedule a conversation.
