Preparing for Retirement Late in the Game

If you’ve come around late in preparing for retirement, take heart… you’re part of the majority. Data compiled by the Federal Reserve indicates that the average American household has only about $5,000 saved for retirement. I don’t know about you, but that won’t get me very far in my later years.

Retirement planning isn’t one of those areas of life where you should be content with “average,” especially if you’re moving closer to your target retirement age. Even if you are late in preparing, though, there’s plenty you can do to make up for lost time.

Save All that You Can, Everywhere

Even if you have nothing saved for retirement, you shouldn’t give up now. Though you may not be able to tuck away $1 million for the golden years, whatever you can save will leave you better off than if you settled for nothing.

The secret at this stage is to take advantage of any and all retirement savings plans that are available to you.

At a minimum, almost everyone qualifies to open an IRA account. Though you can contribute up to $5,500 per year to an IRA (as of 2017), if you’re 50 or older you can contribute up to $6,500 with the added catch-up limit. If you’re married, your spouse can contribute the same amount, enabling you to save up to $13,000 this year. If you’ve never gotten into the habit of saving in the past, you can deduct IRA contributions directly from your payroll, just the way you would any other direct deposit account. That will enable you to save automatically.

If you save that amount beginning at age 50, and invest it with an average annual rate of return of 7% for 15 years, you’ll have $343,377 at age 65. That’s not bad for someone who starts saving for retirement late in the game!

Should you decide to delay retirement to age 70 and continue making annual contributions, those IRA accounts could grow to $564,340.

Also look into opening a Roth IRA Account

In addition to an IRA, you should also take advantage of any retirement plans you have at work. If your employer offers a matching contribution, you should contribute up to the maximum level that will produce the largest match. It’s free money, so why leave it on the table?

Limits for 401(k) contributions are also higher if you’re 50 or older. While contributions are capped at $18,000 for most people in 2017, they go all the way to $24,000 if you’re at least 50. A contribution that large — plus an employer match — could really supercharge your retirement savings late in the game.

Save Outside of Your Retirement Plans

Just because accounts are not specifically designated as retirement accounts doesn’t mean you can’t use them for that purpose. And if you’re preparing for retirement late in the game, you should consider doing exactly that.

Non-retirement accounts actually have a few advantages over retirement accounts themselves:

  • You can put as much money into them as you like, since there are no contribution limits the way there are with retirement accounts
  • If you need to, you can always access the money early, and there are no early withdrawal penalties (except on certificates of deposit and annuities)
  • Since non-retirement accounts are funded with after-tax income and taxes are paid on investment income as it is earned, you can access money from the accounts in retirement without creating a tax liability

Should You Contribute to Your 401k With After-Tax Funds?

Saving money in non-retirement accounts, on top of making contributions to IRAs, can go a long way toward building up assets for retirement… even with a late start.

Pay Off Debt

Paying off debt won’t give you an income in retirement, per se, but it will lower your living expenses. That might be even better, since income is subject to income tax, while the cash flow from a paid debt is not.

In addition, paying off debt can potentially give you a higher return on your money than investing a similar amount.

For example, let’s say you owe $20,000 in credit card debt, with an average interest rate of 15%. By paying off the debt, you would improve your cash flow by $3,000 this year, or $250 per month. Paying off a debt with a 15% interest rate is equivalent to a 15% return on the same amount of money held for investment. But where can you get a 15% return guaranteed? And even if you could, how long would that trend last?

Let’s also say that you have a car loan of $350 per month. That debt paid off — when combined with the paid credit card debt —  is the equivalent of an added $600 per month “income.” This is like having a small pension!

You can think of retirement as a chance to wipe your slate clean and begin to live a life without debt.

Focus on Paying Off Your Mortgage

Pay off your mortgage as early as you can, preferably before retirement. This is similar to getting out of debt; however, the benefit is usually a lot larger, since a mortgage payment is often the biggest single expense in most households.

Let’s say that you still owe $100,000 on your mortgage, ten years before retirement. Your monthly payment is $1,000. By paying the mortgage off, you will lower your cost of living by $12,000 per year, or $1,000 per month.

No, that doesn’t give you retirement income, but it lowers your living expenses by a large amount, and that’s just as good. It’s an extra $1,000 in your pocket each month, which will feel like added income when the time comes.

Decide: Should You Pay Off Your Mortgage Early or Invest for Retirement?

Plus, paying off your mortgage has another benefit that almost no other debt you can pay off has: once your house is paid off, you’ll have equity in a major asset.

That means that you could sell the house once the mortgage is paid, enabling you to reap a large windfall — probably well into six figures. This would give your retirement portfolio a nice boost. It might even make up for your late start at retirement savings.

Delay Retirement

I saved this recommendation until last, because it is so commonly recommended for anyone who has very little in the way of retirement savings. But it’s an excellent strategy, and one well-worth reviewing.

Simply delaying your retirement from age 65 until age 70 has a lot of advantages:

  • If you also delay receiving Social Security benefits, those benefits will increase each and every year, up until age 70. You can increase your benefit by up to 8% for each year that you delay retirement.
  • You will give yourself an extra five years to save for your retirement.
  • You will give yourself an extra five years to pay off your mortgage or any other debt you owe.
  • The delay will mean that you will reduce the number of years that you will need to provide for your retirement.

How to Tell If You’re Saving Enough for Retirement

So, if you’ve been late in preparing for retirement, don’t give up hope. There are plenty of options available to you that can enable you to make up lost time… even if you’re in a hurry.


Topics: financial planningInvestingPersonal FinanceRetirement Planning

One Response to “Preparing for Retirement Late in the Game”

  1. I’m 52 and contributing as much as I can to my retirement but not as far along as I’d like to be. I currently max out my 401k at $24k and contribute to an investment account. Should I also contribute or max out a traditional IRA? My income is too high to contribute to a Roth IRA.

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