Catching Up on Retirement in Your 40s and 50s
When you are younger, retirement seems like a far-off dream. Then sometime in your 40s or 50s, you realize that the years are passing by in a flash and retirement isn’t as far into the future as you once thought. So, if you haven’t been saving all these years, what can you do to catch up on retirement savings when you are in your 40s and 50s?
Step one, at any age, is to make saving for retirement your top financial priority. There are two types of savers in the world: Those that pay all their other bills and then save whatever is leftover, and those who set a monthly savings target and have that amount taken out of their paycheck and put into their savings account first. My experience is that most people start off life the first way, and they quickly discover that there is never any money leftover at the end of the month to be saved. The only way to save for retirement is to pay yourself first by putting money in savings before you start spending on anything else.
The strategy here is very simple. Come up with an amount that needs to be saved for your retirement, and then make it a priority. A rule of thumb is that people should be saving somewhere around 15 percent of today’s income to be able to replace between 70 to 80 percent of their income at retirement. If 15 percent seems like too big a chunk to take out of your living expenses now, then I suggest starting off with a smaller amount and then automatically increasing it every year until you reach that 15 percent mark. The trick is to have that money taken automatically out of your paycheck, before you even see it, and have it saved to your 401(k) or 403(b) plan or personal savings.
Jumpstarting retirement savings in your 40s
The typical 40-year-old faces a couple of challenges in saving for retirement. They may be married, and perhaps they have children. Perhaps they’ve stretched themselves financially to buy a house, and they are using their resources to build a lifestyle for their family. The focus is typically upon immediate needs, especially the needs of the children. If they are thinking about the future at all, it’s usually about saving for college. Retirement really gets put on the back burner.
However, in addition to their family, 40-year-olds have another person they must take care of: Their future selves. What they do today determines their reality for tomorrow. People envision retirement in a place that has warm breezes and sunshine, but that requires doing some work today.
Those in their 40s still have time working on their side. The power of compounding numbers means that a little bit saved now will increase dramatically over the next 20 to 25 years as the interest it earns starts to earn interest itself. If they can get started now, and let compounding working for them, they’ll be significantly better off for it.
My recommendation for those in their 40s would be to pick an amount to be saved, one that makes you just a little uncomfortable, and get started now. Then, automatically increase what you save each year, adding another one percent of your income to what you save.
Those in their forties should also take time to learn exactly what their employer’s retirement plan is offering. Invest the time to learn how to make it work best for you. If there is an employer match, save enough to qualify for the entire match. This is free money, and it would be foolish not to take advantage of it. Many employers also have the ability to set up automatic increases in savings rates, bumping it up each year by another one percent.
If you are wondering how you can find the money in your budget, take some time to track what you spend over the course of a month. You might be surprised how much of your monthly “budget” falls under the category of “heaven only knows.” $5 on coffee every day can drain $100 to $150 from your budget every month. I’m not saying you can’t drink coffee, but you should make a conscious choice to spend that money while understanding how it affects your long-term financial goals. Understand the difference between what you need in life and what you want in life. Is that $1,000 cell phone really necessary? What about your phone, Internet and cable bill, your triple-play bundles with movies and sports channels included?
Catching up on retirement saving in your 50s
When somebody hits 50, they start hearing the distant drumbeat of retirement. You can remember being 30, and maybe it doesn’t seem so long ago, but there is less time between 30 and 50 than there is between 50 and the normal retirement age of 66 or 67. There is an urgency to things if you are starting your retirement savings in your 50s.
Now is the time for maximizing contributions to a 401(k) account. Everybody is allowed to contribute up to $18,500 each year tax-deferred. Those turning 50 or older by the end of the year can contribute an additional $6,000 in “catch up” contributions. These amounts change every year, so keep on top of them and adjust as needed.
Those in their 50s also need to pay close attention to their asset allocations, that is, where their money is being invested. As you get closer to retirement age, more assets should be allocated to “safer” investments that protect what you have saved.
If you haven’t started saving yet, it’s not just you. I’m working with a charitable organization in Manhattan, which has over 700 employees. Their employer match is incredible — if somebody contributes six percent of their income, this is immediately bumped up a 14 percent savings rate between employer contributions and the employer match — and yet people aren’t taking advantage of the plan! One of the things we’re focused on with this nonprofit is educating the employees on what is available to them.
That is why I tell people that, in addition to starting your contributions early, you also need invest the time to learn exactly what your employer’s retirement plan offers you. It may be a little uncomfortable to start saving for retirement, but there may be free money available to you from your employer, you can use an auto-increase of one percent of your salary each year to grow your contributions and getting started early leverages the power of compounding.
For informational purposes only. Investing involves risk – including the potential for a loss. Please talk to a financial professional regarding your specific situation.