The best time to start saving for retirement is as early as possible, ideally while you are still in your 20s. Saving early provides more time for your investments to grow and ultimately results in exponentially more money during your retirement years. For a wide variety of reasons, however, saving in your 20s—or even your early 30s—is not always possible. Some people may not start saving for retirement until much later in life. If you do not have the opportunity to set aside money in your 20s, you will need to play catch-up if you hope to have a comfortable cushion in retirement. Following are some key tips to maximize your contributions in the late stages of retirement planning.
Max out your 401(k) plan.
If you have a 401(k) plan through your employer, you should work as hard as possible to max it out. While it may not seem like much at first, maxing out your 401(k) plan can mean impressive returns down the line. For example, a 40-year-old woman can have more than $1.3 million saved by age 65 if she sets aside $17,500 each year, assuming a rate of return of 8 percent and no employer matching contributions. In truth, if you are in this situation, you are in a position to save even more since the maximum contribution to a 401(k) account was increased to $18,000 for 2017. In addition, you can make catch-up contributions up to an additional $6,000 annually once you reach age 50. These catch-up contributions can add up to several more hundred thousand dollars in your nest egg.
Think about home equity.
Most financial planners say that a home should not be considered a primary source of income in retirement. At the same time, if you are behind in saving, a home can provide much-needed liquidity during your retirement years. Older individuals can fund living expenses by borrowing against the equity in their homes or by obtaining a reverse mortgage. You should consider a reverse mortgage if lending institutions are trying to increase repayment amounts or shorten repayment periods based on your age. Another possibility is to sell your home outright and move into a smaller, more affordable space since any children will likely be grown up and self-sufficient. When selling, it is important to consider current market conditions and tax consequences. Sometimes it makes more sense to wait if larger profits are likely in the near future.
Save with a Roth IRA.
A Roth IRA offers the opportunity to invest your income on a tax-deferred basis. Not everyone qualifies for a Roth IRA, since the cap on contributions is based on how much you make. For example, if you have a modified adjusted gross income over $133,000, or $196,000 if you are married, you will not be able to contribute to a Roth IRA. If you make less than that amount, it is a great savings tool. For 2017, the normal contribution limit is $5,500. A 40-year-old man who invests this much each year with a rate of return of 8 percent would have accumulated nearly $450,000 by age 65. A Roth IRA is a great option for people who need to catch up on savings, particularly when combined with a 401(k).
Retire a few years later than you had planned.
While it can be frustrating to push off retirement for a few years, you can significantly increase your Social Security benefit by doing so. Between ages 62 and 70, your benefit increases by 7 to 8 percent for each year you postpone retirement. A 65-year-old woman who earns $95,000 and delays retirement for three years will see an increase in her annual benefit of between $28,500 and $35,500 before adjusting for inflation. In addition, the potential lifetime benefit increases by $60,000. Married couples should coordinate to maximize their benefits. The additional income, combined with the additional time spent saving and the extra years for the nest egg to grow, can mean the difference between struggling financially and enjoying a secure retirement.
Secure disability coverage.
If you need to ramp up your savings late in the game, it becomes even more important to protect your nest egg from the unknown. If your employer does not provide some sort of group disability benefit, you should be sure to take out your own disability coverage to ensure that the nest egg does not disappear prematurely. While the risk of disability depends on your career and lifestyle, the 2014 US Census Bureau reported that 57 million Americans reported some form of disability. With a US population of about 300 million, that means nearly one in five Americans has a disability. Possessing disability coverage means that a portion of your income and your nest egg will be safe in the event that an emergency happens.