How to Catch Up on Retirement Savings: Six Steps to Take

It’s easy to get sidetracked when saving for retirement. The immediate needs of daily life may seem to take precedence over a retirement that’s decades into the future. This may be why nearly half of American families have no retirement savings to speak of.

When you retire, you should feel confident that you have enough to see you through the rest of your life. If you have little or no savings, now’s a good time to focus on your retirement nest egg. Here are six steps to help you catch up.

1. Estimate How Much You Will Need
A good financial planner can pinpoint how much you should put aside for retirement; however, this Wall Street Journal article provides a reasonable DIY approach:

  • Estimate the amount of money you will spend in retirement (the article uses the baseline of 80% of what you are earning now).

  • Deduct Social Security and pension benefits from the amount you will spend. The number you end up with is the annual amount that you will need to fund.

  • Multiply the amount you need by 25 to get the amount you should have saved by the time you retire.

  • Evaluate your current savings and investments to determine how much more you need to put aside to reach this amount by retirement.

2. Tackle Your Debt
The more debt you have, the less ability you have to save. Make a plan to pay off your highest-interest accounts first, then tackle the rest of your obligations. Although some debt can be strategic, much of it is unnecessary and can rob you of your ability to enjoy a comfortable retirement.

3. Increase Your Portfolio Contributions
Many employers will match your retirement account contributions up to a certain amount. Contribute at least enough to get the match, and consider contributing the maximum annual amount that the IRS allows. For example you can contribute up to $18,500 to a 401(k) in 2018 and $19,000 in 2019. If you are 50 or over, you can contribute an additional $6,000.

4. Open a Roth
Open and contribute the maximum to a Roth IRA.  Your contributions will grow tax-free, and your withdrawals will generally be tax-free, which can help you manage taxes in retirement. For 2018, you can contribute up to $5,500, with a $1,000 catch-up contribution if you are age 50 or older. In 2019, you can contribute up to $6,000.

If you need to save significantly more than your 401(k) and Roth will allow, then consider opening a taxable, non-qualified brokerage account. You won’t receive the same tax advantages, but you will be able to contribute as much as you like.

5. Increase Your Income
Increasing your income can serve a dual purpose: (1) It may help increase the amount of Social Security you receive, and (2) you can commit the increased income toward your savings. If a raise isn’t in your future, you might consider whether you should pursue a higher-paying job, work additional hours, or get part-time work with a second job.  

6. Delay
Retiring later can give you the opportunity to save even more. While you are considering postponing retirement, also consider delaying Social Security. Many people take their benefits at age 62, when they’re first eligible, but they’ll receive a reduced amount. For each year you wait up until age 70, your Social Security benefits will increase.

Realizing that you’re behind on your retirement savings may be dismaying, but take heart: By taking action now, you can put yourself in a better position to retire with confidence that you will be OK. These steps can give you a good starting point; however, if you want personalized advice, we encourage you to reach out to a fee-only financial planner for personalized advice.