Tips for Saving for Retirement if You Started Late
With the demise of traditional defined-benefit pension plans over the last few decades, the burden of retirement security increasingly falls on us as individuals to make sure we have saved enough for our own golden years.
No matter your age, many individuals find that they may be behind where they ideally need to be to get back on track to have a comfortable and worry-free retirement lifestyle. If you are not sure where you stand or would like a second opinion, using a tool like the free Ridgewood Retirement Readiness Calculator can give you a good overview on where you stand right now.
Fortunately, there are many ways to be more savvy about securing a comfortable retirement, even if you started saving for your golden years later in life. Here are a few tips for your consideration that can put you back on track. Tips to boost your retirement savings and readiness especially if you started late.
Tip #1: Take Stock of Your Current Situation
First and foremost, conduct an honest assessment of your current retirement savings. For most folks, retirement assets and income will come from three sources: (1) qualified retirement plan accounts from work such as IRA’s and 401k’s, (2) social security benefits, and (3) personal savings. Of course, your personal situation may be different, such as owning some income producing rental real estate, but for the majority of Americans, the big three sources are among their primary vehicles for retirement planning and saving.
Here are some questions to review to begin an honest assessment of your retirement savings status.
Do you have any money working for you in IRA’s or a retirement plan at work? If so, how much? Are you making regular contributions to these accounts? Are the investments optimized to give you the best retirement income?
Will you be eligible for Social Security, and when can you expect to begin receiving benefits? In most cases, your social security benefit will not be enough to fully provide for your retirement - but is a nice supplement that is worth paying attention to.
Have you established a wealth-generation portfolio of stocks, bonds, and other assets like income real estate that are outside of your qualified accounts and available to generate additional income for your golden years? Do you add to this account regularly?
Your retirement assessment is a snapshot in time and will reveal how much you have saved and how well it is positioned to grow your resources before retirement. Moreover, it will provide an indication of whether you are in reasonable financial shape going forward, or perhaps a bit behind and need to have a plan to do some catching up. If you are not sure you are prepared to do this yourself, a qualified advisor like Ridgewood Investments can help.
Tip #2: Consider Increasing Your Savings Percentage
Perhaps the simplest way to start getting back on track if you find you are behind is to increase your savings rate for retirement. If you are not systematically saving a specific amount for retirement, late is better than never (and it's never really too late if you have a sensible plan). Assuming you have the income, are willing to reduce discretionary spending when it makes sense and save and invest the surplus intelligently, you can quickly start catching up on your long-term goals.
Let’s say you already save regularly. Note that any increase will start to accelerate your progress. If, for example, you are already directing 5% of your paycheck to a 401k or IRA, increase your percentage to 7% or more. Furthermore, if you are already maxed-out on your eligible IRA and company retirement plan contributions, start a systematic long-term investment program outside of a qualified plan in other taxable investment accounts to maximize your options.
If your current income from your main profession does not permit you to save more, consider developing a money-making side-gig or part-time position or business. The key is to start slowly and work with something that you love. According to Entrepreneur magazine, developing an Amazon-seller business, becoming a freelance writer, starting an affiliate-related business, and/or teaching something that you know and love can all be used to supplement your main income. Since the side business is supplemental, you can direct most of these extra profits to your retirement goals. Even better is that business income allows you to have access to higher retirement contribution limits though accounts like a Solo 401k plan or a SEP IRA.
Tip #3: Take Advantage of Catch-Up Contributions in Retirement Plans
Catch-up contributions for qualified retirement plans can enable you to make some accelerated progress towards boosting your retirement savings. Designed for people 50 years old and above, catch-up contributions allow eligible retirement savers to contribute amounts in excess of the standard limit to their qualified retirement accounts. The reason these exist is that the government recognizes that many people are behind on their retirement savings goals, so they have created an incentive to make optional extra contributions for those beyond a certain age. Here are the key facts to know about Catch-Up Contributions:
For 2019 and 2020, the standard IRA contribution limit is $6,000 a year, while the catch-up limit is $7,000.
If you are enrolled in a 401(k), 403b or 457b plan, you can generally contribute as much as $19,000 each year from salary deferral alone. If you are age 50 or older and your employer allows catch-up contributions, your limit increases by $6,000 for 2019 and $6,500 for 2020 over and above the normal $19,000 salary deferral limit.
If you have a SIMPLE 401k plan, the catch-up contribution is $3,000 over and above the standard $13,000 limit for 2019 and 2020.
Tip #4: Have You Been Too Conservative With Your Retirement Portfolio?
Perhaps you’ve been a little too conservative in your investment allocation with your retirement savings. This may be the case if your retirement accounts are all or mostly in cash equivalents, such as money market funds or certificates of deposit.
People who tend to be fearful or risk averse often make this mistake. Partly because they don’t know how to invest better on their own. Unfortunately, if your investments are too conservative, the growth potential you can get is so limited that it will be putting all the burden on your ability to save as much as possible. It would be like having a 100 horsepower engine in your car but turning off more than 50% of your engine and getting by with what is left over.
As of early 2020, most cash-equivalents are paying a very low interest rate of return. The current Fed Funds Rate is 1.75%. Based on The Rule of 72, which helps you estimate how long it will take to double your investment at a certain return, investing in cash equivalents will take over 40 years to double your account. If you generate little or no growth on your savings as a result of your overly conservative investment allocation - it can actually put your options for retirement well-being at risk.
In contrast a more balanced portfolio that includes a healthy allocation to stocks, bonds, and income real estate can result in growing your retirement accounts well beyond the amount that you can personally save.
Consider putting your retirement portfolios on a growth trajectory, especially if you are early in your retirement savings program. Generally speaking, common stock investments as well as bonds and income real estate can add growth that can really benefit your retirement income. At even a still modest 6 to 7% return per year - your money doubles in 10 to 12 years which is a lot faster - and after several doublings your retirement options are far more robust.
Tip #5: Evaluate Your Asset Mix and Consider Rebalancing Your Portfolio
Most investment professionals recommend a mix of stocks, bonds and cash-equivalents for retirement portfolios. The exact mix is likely to vary with your age, becoming more conservative as you close in on retirement.
A portfolio invested 60% in a diversified global stock fund and 40% in a total bond market fund would have earned 5.74% annually from 2008 through 2017, much better than a pure cash investment. Other asset mixes that can be tailored to your individual situation can perform even better than a 60/40 portfolio.
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Without a doubt, the path to retirement readiness may appear daunting, especially if you’ve started your savings program late. In actuality, there is no need to panic. Rather it is a time for calm assessment and decisive action to get you back on track.
If you have questions about your retirement savings, or need a detailed, personalized plan going forward, then consider establishing a professional relationship with a trustworthy financial advisor.
Ridgewood Investments, based in NJ and CA, is known for its excellence in retirement planning and investment management and we would be happy to chat with you to compare notes and go over your available options.
A tailor-made, personalized financial plan may be just the thing to help put you back on track for a successful and stress-free retirement lifestyle.
About the Author
Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.
Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.