5 Steps to Catch Up on Retirement Savings
It happens all too often. When you start out in the working world, you are focused on just getting by. You have bills to pay, and perhaps student loan debt to pay off too. A few years later, maybe you get married, buy a house, and start a family. And before you know it, you hit your 50’s and realize that retirement is not that far off. Then you start to wonder if you have enough saved for retirement. You are certainly not alone if you feel you could be more prepared for a financially comfortable retirement.
The role time plays in your retirement savings
The reason time has such an impact on reaching retirement savings goals stems from the basic fact that there are two elements to your retirement plan: your contributions and what your contributions earn through investments (compounding). When you invest, the money generates investment earnings, and those earnings generate more earnings as time goes on, and so on. To really get your money working for you, you need to give it time to earn those investment gains. In short, the less time your money has to compound, the more money you must contribute to reach a certain goal.
If you are concerned that you don’t have enough saved for retirement, here are five actions you can take now to get your retirement plan on track.
1. Increase your retirement plan contribution
Increasing the amount you contribute to a qualified retirement plan, such as a 401(k), is the surest way to increase your retirement account. Many people defer only the amount necessary to get the maximum employer match contribution, but you shouldn’t stop there, especially if you’re trying to catch up on lost saving time.
You can contribute up to $19,500 (in the year 2020) to your 401(k), and if you are over age of 50, or if you turn 50 this year, you can contribute an additional $6,500. This is known as a “catch-up contribution.”
2. Review your current financial situation
Taking a comprehensive look at your current financial situation, including all your recurring expenses and debt, can give you an idea of how much money you may need in retirement to maintain your lifestyle. Identifying this will help you understand how much more you must save before you may comfortably retire.
Reviewing your financial situation can also help you identify expenses you can trim. Any trimming you make frees up more funds to contribute toward your retirement plan.
Keep in mind, it’s important to make eliminating debt – especially high-interest credit card debt – a priority before retirement so you don’t have to worry about it during retirement. Once you’ve paid off your loans, take what you would normally pay to your creditors and add it to your retirement savings contribution.
3. Build an emergency fund
It’s important to build up an emergency fund so you’re not tempted to dig into your retirement savings early if you experience an emergency expense. Taking early withdrawals from a qualified retirement plan can come with a financial penalty, in addition to hindering you from reaching your goals.
4. Review where and how your retirement account is invested
As you get closer to retirement, you may become a more conservative investor, opting to safeguard your savings by investing more heavily in lower-risk investments like bonds rather than higher-risk investments like stocks. However, if your contributions have had less time to grow on their own, you may want to continue investing more aggressively to potentially earn higher investment returns. Evaluating how much you have saved so far, how much time you have left to save, as well as your personal risk tolerance will help you decide the proper asset allocation for your portfolio.
5. Consider meeting with a financial advisor
If you’d like more support and guidance while making changes to your retirement savings approach, or simply want to make sure you’re on the right track, consider meeting with a financial advisor. An advisor will take a comprehensive look at your entire financial situation and create a personalized plan for your unique situation.
No one knows for sure if they’ve saved enough for retirement, until they’ve reached retirement of course. We can’t predict every expense we may have or the amount of taxes we’ll be required to pay. But there’s no need to panic, as it’s never too late to correct your retirement savings and get back on track so that you’re prepared for whatever awaits you in retirement!