For anyone nearing 40, retirement should be at the forefront of financial planning. A GoBankingRates study shows that 56% of surveyed workers have less than $10,000 saved for retirement and a third of workers over 50 have no retirement fund. Social security won’t be enough to pay the bills so what can workers do to catch up with their peers?
Sometimes the reasons why people are unable to save for retirement are complicated. They include putting kids through college, procrastination, emergency medical bills that wipe off saved funds and other problems. Whatever the reason, remember you’re in the last 15-20 years of an active work life and should be thinking of how to make concrete plans in such a short time.
10 step guide to catchup retirement income plan
- Access your financial situation
A transparent assessment is the first step to retirement planning. How much do you have in your IRAs and workplace pension plan? How much will it cost to reach your retirement goals? How much debt do you have vs money coming in? These are key questions to ask in your retirement budget.
Figure out how much you need to save for a comfortable retirement life using the 4 percent rule. Checkup on your current investments and include debt payments in your plan. Once you have a budget and financial plan, its’ easier to put it into action.
- Take advantage of catch-up contributions
When you reach 50 years, you’re allowed to make catch-up contributions in addition to your regular contribution limits. It includes $3000 in catch-up contributions to simple 401K plans or simple IRA. If you’ve worked 15 years, you can make contributions to your 403b plans in addition to your regular $6,000 in catch-up contributions.
- Identify existing income streams
Your current retirement savings will provide the bulk of retirement income, but it shouldn’t be the only source since you’re playing catchup. For workers with no retirement savings, social security benefits accrued through career earnings might be their only hope for retirement income. Use the retirement estimator to see what you’ll earn as monthly income in retirement. Most likely, it will be grossly insufficient.
- Increase your savings
Usually, most people save between 10-15% of their annual income, but you need to start with 20%. If financial discipline is hard, automatically deduct the money to your retirement account. For a $1 million dollar retirement fund, retirement finance experts, Retirement Income advise you save $3,000 every month where possible. You can save up to $17,500 in 401ks, $5,500 in IRA.
- Clear all consumer debt
The error in judgement most people make when their income rises is to increase expenses instead of saving more. Credit card debt is expensive and wasteful. Pay off cards with the highest interest balances and use the freed up funds to pay off the remaining cards. As you settle old debts, be careful not to accumulate new debt. Once you’ve finished the payments, redirect the money to smart investments so you’re financing retirement as a wealth builder.
- Don’t give into the temptation of high-risk investments
In a bid to catch up fast, some investors take on additional investment risk where the potential returns are higher by up to 12%. The risk for such investment is just as high, so align risk with age. Young people recover faster from a high-risk investment loss. The older you get, the safer your investments should be. A recommended asset allocation is your age in bond funds and the rest in stock funds to diversify investment.
- Chose funds with lower investment fees
When choosing funds for a 401K, it’s easy to think that the difference between a fund with annual expense ratio of 0.25% and another with 0.16% has negligible difference. However, the difference compounds with time and a $60,000 dollar investment would cost $150 a year on the first and $96 on the second fund. Studies have also shown that expense ratios are a reliable predictor of how future funds will perform and one research reveals that low-cost funds perform better than high-cost funds.
- Consider a second job or moonlighting income with your skills
In the savings game, the figure that counts isn’t your salary or income, but what you keep after expenses and tax. You could get a weekend job or consider moving to a new company that offers lucrative pension to takes the pressure off your savings. An advantage of having a second career you love is that it makes it easier to transition to the moonlighting income after retirement. For this strategy to work, the second career has to be in a field you’re passionate about, probably an innate skill that is commercial such as painting, tailoring, music, and other skills.
- Consider moving to a city where you can retire on Social Security
It is a humbling experience having to make financial adjustments but statistics shows that almost 62% of American retirees expect to use Social Security to fund retirement. So, if your retirement budget doesn’t raise the required funds, look up affordable cities where you can retire comfortably. Examples include Buffalo-New York, Memphis-Tennessee, and Akron-Ohio.
- Consult a financial adviser
Not everyone is skilled in money management and you might maximize your efforts with the guidance of an expert. A good planner ensures your investment portfolio is risk-appropriate to your age and provides advice on estate planning as well.
- Reduce expenses
Some monthly payments you’re making are unnecessary. For example, your insurance policies that were essential 20 years ago might be unimportant today. The rule to insurance is to protect what you can’t afford to lose. Where possible, divert premium payments to a retirement fund.
If you live in a large house, think about downsizing once the kids have moved out. A smaller and less expensive house affords you the opportunity to earn higher income for retirement and reduces expenses you were previously paying in a bigger house.
If you’re over 40 and you haven’t started saving for retirement you have 20-25 years to build a worthy investment portfolio. Your financial planner will help you figure the best ways to generate returns unmatched by savings or IRA. Invest and save aggressively, monitor progress with your budget calendar and remember that saving more and spending less is critical to any late retirement planning.