Most financial advisers agree: The simplest way to ensure
you retire comfortably is to start saving early and let the power of compound interest
work for you over time. But what happens if you’re getting a late start on
retirement, or financial troubles in middle age have eaten into your nest
egg? If this sounds like you, you’re not alone. A survey from finance website
Bankrate.com found that more than one-third of Americans don’t have a
penny saved for retirement, including more than a quarter of those ages 50
to 64.
While it’s admittedly not ideal to be behind on your
retirement plans, the good news is that catching up isn’t complicated. It just
involves cutting back on discretionary spending and staying disciplined as
you look to build your nest egg in a shortened period of time. If you’re just
now realizing how far behind you are on saving for retirement, here are five key
ways to catch up relatively quickly and effectively:
• Focus on debt. Making
sure you save more is wise, but it’s crucial also to remember that any debts
you take into retirement will mean continued strain on your budget, says Travis
Sollinger, director of financial planning at Fort Pitt Capital Group
in Pittsburgh.
• Max out tax-deferred
accounts. A straightforward way to catch up on retirement savings is
to take full advantage of an IRA and 401(k), says Greg McBride, chief financial
analyst at consumer finance portal Bankrate.com. The limit for 401(k)
contributions is currently $18,000, with Americans 50 and older allowed to
contribute an extra $6,000 annually; the limit for IRA contributions is
currently $5,500, with those 50 and older allowed an extra $1,000 annually.
“Paying yourself first” by taking money directly out of your paycheck ensures the
money is saved, McBride says, and takes a lot of guesswork out of retirement
planning.
• Reduce advisory
fees. If you are playing catch-up on retirement investing, you can’t
afford to spend a penny more on fees than you have to, says David Fabian,
managing partner and chief operations officer of FMD Capital Management. Choose
low-cost index mutual funds or ETFs over high-fee annuities or actively managed
funds, Fabian says. For context, a 2015 fee study by mutual fund
research firm Morningstar estimated that the expense ratio across all mutual
funds was about 0.64%, or $64 per year on every $10,000 invested.
• Work longer. While
it’s not ideal, a powerful way to catch up is simply to work longer. Besides,
some Americans work later in life out of a desire to stay active, not
necessarily financial need. For instance, a 2014 survey from Merrill
Lynch found that 80% of those employed in their golden years said
“I work in retirement because I want to” instead of “I work in retirement
because I have to.”
• Don’t fall for
shortcuts. Fabian says it’s important not to panic, making risky bets
on overly aggressive investments or putting all your eggs in one basket because
you think you have found a sure thing. All portfolios should have “multiple
asset classes, like stocks, bonds and cash, to reduce portfolio
volatility,” he says. This will create greater overall diversification and put in
place the necessary components you will need to ultimately transition to an
income plan in retirement.
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