- Falling behind in retirement savings is common, but there are plenty of ways to close the gap.
- Consider other investing account options beyond just the typical retirement vehicles like your 401(k) and IRAs.
- Reducing discretionary spending and paying down debt can free up more cash to put toward your retirement goals.
For most workers, retirement savings are in 401(k), individual retirement account (IRA), or other defined-contribution plans that do not provide a specific amount of benefits at retirement like pensions do.
These plans need to be funded over time through regular contributions, and the money available after retirement depends on how much is in them when you’re finished working. Starting early and maintaining steady contributions throughout your working life is crucial because the earnings on your savings are reinvested to generate their own earnings. This produces a snowball effect that can significantly increase the growth of your nest egg through a principle known as compounding.
Falling behind schedule on your contributions can have a big impact on how much income you’ll have available when you retire. But there are a few tactics you can use to get caught up and back on track.
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4 ways to catch up on your retirement savings
1. Reduce discretionary expenses or increase your income
The first step in getting back on track is to take a careful look at where you’re spending money now with an eye toward cutting out things you don’t necessarily need and using those funds to beef up your retirement savings. If you feel that your budget is already too tight and there aren’t any areas that could be reduced, consider ways to increase your income.
While taking on a side hustle is one way to earn additional money, you may see even more benefits by changing jobs. Data from the
Bank of Atlanta shows that for more than a decade, those who switched to new jobs have consistently seen their salaries increase faster than those who stayed with their employers. This impact of salary growth can be magnified even more if the new employer offers matching contributions to your 401(k) on that higher salary.
Taking an inventory of your spending can also be a good opportunity to see how much of your income could be going toward your debt. If you can make a plan to pay down the debt, it can make it easier to maintain your lifestyle while in retirement.
“With no debt, your retirement expenses will be easier to manage, and you can put the money you were spending on debt toward saving for the future,” says Jay Zigmont, a CFP® professional and founder of the financial planning firm, Live, Learn, Plan.
Keep in mind that it is not an “either or” situation when looking to pay off debt and invest for retirement. In most cases you will want to strike a balance between the two, especially if you’re behind.
2. Fully fund your retirement accounts, including the catch-up contribution
Achieving your goal of catching up likely will require you to fully fund your retirement accounts. In many cases, this would include your 401(k) if you work in the private sector or 403(b) if you work in the public sector. But you have the ability to contribute even more starting at age 50 making it a crucial component of retirement planning.
“The number one component is the catch-up factor that is embedded in retirement plans,” says Max Pashman, a CFP® professional and owner of Pashman Financial LLC. In 2022, you can contribute as much as $20,500. If you’re age 50 or older you put in an additional $6,500.
In addition to these options, you can use your individual retirement account (IRA). For both a Roth IRA and a Traditional IRA, the 2022 contribution limit is $6,000, with an additional $1,000 allowed for those age 50 and over.
“When you get closer toward your retirement years, if you’re 10 years or even less away, you really want to analyze if you’re underfunded,” Pashman says. “And if you are, you want to take advantage of those catch-up contributions.”
Depending on your income, you can contribute to a 401(k), Roth IRA, and Traditional IRA at the same time. However, if you contribute to both a Roth IRA and Traditional IRA the limit is still $6,000 combined, $7,000 if you are 50 or older.
3. Invest beyond your retirement accounts
What happens if you’re still behind after maxing out your retirement account? While it may sound a bit counterintuitive, your non-retirement assets like a taxable brokerage account can be a powerful tool to use when saving for retirement.
Taxable brokerage accounts do not have income or contribution limits like the accounts specifically designed for retirement. Because there isn’t a limit to how much you can contribute, a taxable brokerage account is another avenue to invest if you’ve maxed out in other areas. Taxable brokerage accounts also do not carry the same tax benefits. However, these types of accounts can allow you to invest and make withdrawals without penalty.
Having a combination of funds with various tax statuses is known as tax diversification. This concept can provide flexibility in retirement when you’re ready to begin withdrawing.
4. Consider adjusting your retirement timeline
If you enjoy your job but you’re just a little bit behind, you could adjust your retirement timeline and work a little longer to accumulate more for retirement.
Pushing back your retirement date may also increase the amount you receive in Social Security benefits. “Social Security plays a big role as far as your [retirement] needs,” says Pashman. Those who may not be as far behind may be more flexible in delaying Social Security while those who need the income sooner will need to approach the situation differently.
Under the current rules, if you were born between 1943 and 1954 you will receive 100% of your monthly benefit at age 66. But if you delay taking the benefit you can receive a higher payout which maxes out at age 70 at 132%.
If you’re thinking about working longer to save more and delaying Social Security, consider talking to a financial planner to help navigate these decisions. The decision on when to take Social Security will be dependent on your expected income in retirement.
“It’s ultimately going to depend on where you are financially during the beginning of your retirement years,” says Pashman. “It comes down to what your monthly cash flow projection is going to be for the first coming years of retirement.”
Remember, retirement is not the end
Reaching retirement doesn’t mean that you have to stop investing. In fact, there are a few ways that you can offset a retirement shortfall even after you’ve decided to leave your full-time job. One of them is to take on a part-time job.
“A half-time minimum wage job is about the equivalent of having an additional $150,000 in retirement savings,” says Warren Ward, a CFP® professional with WWA Planning & Investments.
How is a part-time job worth $150,000 in retirement savings? In retirement, one rule of thumb is to withdraw 5% from your accounts each year to replace your salary. This would mean that $150,000 would be needed to produce $7,500 annually in retirement. If you could obtain a part-time job in retirement you could offset the need to have an additional $150,000.
There are also opportunities to continue investing after you’ve reached retirement to continue producing income if you don’t need the cash to support your immediate needs. Certificates of deposit (CDs), annuities, bonds, and high-quality dividend stocks are among the most popular investment assets for retirees.
The important thing to remember is that if you are behind on your retirement-saving schedule, you have an array of options available to you. The key to catching up is being flexible in adjusting your plan and finding the right combination of strategies to help you achieve your goal.