Time…Could've, Should've, but didn't get more of it working for my investments.
Just about everyone agrees that the best time to start saving for retirement is as early as possible. Why is that? Those investing on a longer time horizon may be better positioned to afford the ups and downs within a market cycle because they have time to potentially recuperate from the impact of a bumpy ride, (assuming the person is invested in a diversified risk appropriate portfolio- FYI, if a person has a hard time sleeping at night because of their investments, they may not be in the right portfolio) and their earnings have more time to compound. (My wife who is not a numbers person, really gets pumped when I explain the powerful impact of compounding.)
Unfortunately for a myriad of reasons many Americans find themselves in the position of getting a late start at saving for retirement. Perhaps they were unable to afford retirement savings, or they just didn't get around to it. All is not lost, however. Lost time can be made up for by applying a few simple tips. Here are nine tips to help investors with a late start on retirement savings make an effort at getting back on track. (2 things- 1) It’s important to make a plan. Get the plan down on a paper. This helps to make goal setting more real and hopefully attainable 2) I suggest seeking guidance from a financial professional to help make the “lemonade” from the fruits in your current basket. We sometimes need to be accountable to another person and working with a professional may provide added value to someone trying to catch-up for lost time).
#1 Save More
By far the most effective way for investors over 50 to realize their retirement goals is to ratchet up the amount they save. There is nothing that will have a more positive impact on retirement savings than to simply increase the amount being saved. If an employer-sponsored 401(k) plan is offered, investors should be sure they are contributing at least as much as the employer will match, if not more. In general, up to $18,000 may be contributed to a 401(k) plan per year, but investors over age 50 can contribute another $6,000 in “catch-up” contributions.
#2 Don't Take on More Debt
We live in a consumption-focused economy, and it can be incredibly easy to swipe the credit card for that new gadget or take out a loan for that new car. Interest charges are not worth the cost, though, especially when the focus is on retirement savings. Retirement savers should consider skipping that next purchase if they can't pay for it with cash. The money that would be paid in interest can work more effectively for them in a retirement account.
#3 Don't Hold Too Much Cash
We have already discussed how saving more is the most effective way for investors over 50 to improve their retirement outcome. Those savings should be put to work instead of sitting on the sidelines, though. While investors this close to retirement age shouldn't be investing as aggressively as possible, they should allocate in accordance with their level of acceptable risk tolerance in order to see some yield on their money. This may be a mix of stocks and bonds, for example. A financial professional can help determine a suitable portfolio.
There is another ‘money on the sidelines’ example that l come across which is those that put money into a company 401K, IRA, Roth etc but have kept the money in cash. This money is not benefiting from being in a tax deferred account. There wouldn’t have been any tax to pay on this money had it stayed in a non-tax deferred account (to me this is a red flag). I met with someone nearing retirement that had all their money sitting in cash for over 22 years. This person lost out on the benefit of time and the purpose of being in a tax deferred account. (It pains me to see these types of situations.)
#4 Be Careful with Risk
While taking on some level of risk is necessary in order to see growth of retirement savings, now is not the time to go wild with aggressive or speculative investing strategies. Investors should stick with what they know and avoid investments and strategies that they don't understand, especially instruments that promise a higher-than-average yield. (I come across this all too often where client’s have no idea or can’t explain investments they are in. This usually come up when they have specialized fixed income products. They don’t understand the risk or the fees they are exposed to with some of their investments). Investors getting a late start should keep in mind that there are no shortcuts to getting rich.
#5 Think About Additional Streams of Income
One way to increase savings for later while not giving up quality of life now is to find a way to supplement existing income. This can be anything from working a part-time job to developing a “side hustle” using skills that a person may already have. For bonus retirement points, a person could dedicate their additional stream of income to retirement savings entirely, committing to put all “extra” income into a retirement account. I have an example of someone who wasn’t saving nearly enough for retirement. Money was tight. He recently got a side-hustle that will earn him $5,000. He plans on taking the dollar amount he will be earning from the side hustle and adding to his current employer’s 401K.(see chart below) Let’s say for example he made 50K a year and was in the 20% tax bracket. He would be paying 10K in taxes. This person also earned $5K via his side hustle which in this example will be taxed at 20% = $1K and 15.3% self-employment 1099 tax of $765.
In this example we see that with Option 1 the person would take home $40,000 after taxes but in Option 2 although he’ll be taking home a little more that in Option 1, ($235) in this situation there would also be an additional $5,000 placed into his employers 401K. In this overly simple and black and white example, I would posit that Option 2 may be better- pay less in taxes and keep an addition $5,000 in a tax deferred account.
# 6 Ease Into Retirement by Working Longer
There is no rule stating that workers must go from full time work to complete retirement overnight. Many people who are ready to slow down but still enjoy their work are keeping their jobs but only working part-time. This allows them the enjoyment of more leisure time while still maintaining an income. (There is also another matter to consider which is a Required Minimum Distribution(RMD), a typical employee (non-owner) that continues to work doesn’t need to take out form that employer’s 401K even if he/she is over 70.5. So you’re money gets to grow longer and your income isn’t impacted by the RMD). Employers, in turn, get to retain the skills of valuable experienced employees.
#7 Consider Downsizing Your Residence
A lot of pre-retirees are empty nesters who still occupy the large home in which they raised their children. While living in a familiar residence can be comforting, downsizing to a smaller home may be a better option. Whether it's a house, a townhome, or an apartment, the smaller the home, the easier it will generally be on the wallet. Even if the house is paid off, retirement savers over 50 might be surprised at how much maintenance costs, utilities, and taxes can add up to be.
#8 Financing Retirement
“Buyer Beware” of the products showing you the retiree ways to get access to cash. The three that come to mind are equity lines lines of credits, margin accounts in brokerage account and reverse mortgages. Each one of these may be a good option for some as long as it’s not exposing you to unnecessary risk, high costs and done with a reputable institution or professional.
#9 Don't Experiment with Your Future
Whether it's a risky career change or taking up day trading, being close to retirement and not prepared for it is not an ideal time to start experimenting. Investors in this situation should practice moderation in areas that affect retirement savings. Once they have found a path forward to a successful retirement, it's best that they stick with it.
#10 Start Now
Perhaps most importantly, investors who are getting a late start on retirement savings should not wait another day before taking action. There's something that can be done today, even if it's a small thing such as increasing their savings by 1%. Not to sound morbid, but every day that passes brings us all one day closer retirement. Someone who wishes today that they had started saving for retirement five years ago doesn't want to wake up five years from now wishing they had started saving ten years ago.
There is no doubt about it: getting a late start on retirement savings presents a challenge. It's not impossible, though, to still make more happen for your retirement even if a person is late to the game. Additional effort and discipline is a requirement, but it can certainly pay off towards getting you one step closer to your retirement goals.