If you ask any financial advisor, they will tell you that the best retirement advice they can give, is to start early. Using the power of compound interest, you will be able to retire much more comfortably if you start saving early in your career rather than late.
Unfortunately, that plan doesn’t work out for everyone. Life gets in the way and unplanned expenses present themselves. A 2014 study conducted by Bankrate.com found that more than one out of every three Americans haven’t saved anything for retirement.
So what does this mean for anyone in the second half of their career hoping to retire as close to 65 as possible? It means they need to work even harder to start saving money and in some cases reducing debt. Here are five tips to help you play catch up on your retirement savings.
Max Out Your Retirement Accounts
If you are an owner-operator, you most likely don’t have a 401k to rely on. That leaves you with a couple of options. First, you can invest in an IRA or a Roth IRA. The normal contribution limit is $5,500, but if you are older than 55, the limit is increased to $6,500 to help you catch up.
The other option for anyone that is self-employed is to set up a SEP IRA. Any individual that owns a business, or anyone that earns freelance income can set up a SEP-IRA. The biggest benefit that you have when setting up a SEP IRA is that the contribution limits are much higher than they are with a traditional or Roth IRA. In 2016, the limit is 25% of total income or $53,000, whichever amount is less.
Become More Aggressive
As a general rule, the closer you get to retirement, the less aggressive you should be with your investment choices. However, if your retirement account isn’t where it should be, then you can adjust your investment allocations. Instead of moving towards more conservative, income-preserving options, you can opt to continue investing in higher growth stocks and funds. Just be aware that this also means you will be taking on more risk in your portfolio.
Get Rid of Consumer Debt
The further into your career you get, the more of a burden debt can be for your retirement savings. Instead of putting money away for your future, you are using it to pay off the interest that keeps accumulating. Instead of paying the minimum balances on your credit cards, pay as much as you can. Once your debt is gone, you can focus on saving for retirement.
Cut Your Spending
If you really want to speed up saving for retirement, start reducing the amount you spend each month. Shop around for all of your insurance policies, cut the cable plan at home, and reduce the data you use on your cell phone. Let’s assume that someone who is 50 years old reduces their spending by $100 per month and invests that money. If they can earn 8% interest on that $100 each month, they will have an additional $34,295 for retirement by the time they reach age 65.
The Bottom Line
If you find yourself behind with retirement planning, don’t stress too much. With hard work and a little cost-cutting, you can get yourself back on track to live the comfortable retirement you have always dreamed of.