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You’ve likely heard the advice to start planning for retirement with your very first job. And while some did just that and have a tidy little nest egg, most Americans didn’t take that advice to heart. In 2022, only 22% of those aged 60 to 67 believed they had enough saved for retirement, according to Schroder’s U.S. Retirement Survey.
How much do you really need for retirement? Of course, the actual amount depends upon your financial situation and the expenses you expect to have after retirement, but many Americans surveyed believed they would need over $1 million in savings to retire comfortably. That’s a serious problem, because the majority of retirees have less than $250,000 in savings at retirement.1
But the good news is that you can catch up on retirement savings. You might not wind up with as much of a nest-egg as you would have had with the benefit of compound interest over four or five decades, but you can still create a nice retirement fund that can see you through your golden years. Here’s how.
Max Out Your 401K
If you have a job that offers a 401K, take full advantage of it right now. Fund your 401K to the maximum amount offered by your employer. In 2023, the maximum contribution limit is $22,500. However, if you are over the age of 50, you’ve got even more going for you with the “catch-up contribution.” This is an amount over the usual limit that you can put toward retirement. In 2023, those who are over the age of 50 can contribute a maximum of $30,000 to their 401K.2
Let’s assume you put your money in your 401K and it doesn’t grow at all – it just sits there, as if it were in a no-interest savings account. Contributing $30,000 per year means that someone who is 50 years old this year will have $300,000 in savings by the time they are 60 years old, which is not a bad number. But as the investments in your 401K grow, you can expect to see more money than that.
If you work for an employer that offers matching contributions, that’s even more cash in your retirement pocket every year.
Open an IRA
In addition to your 401K, opening up an IRA will allow you to save and invest tax-deferred money. You can contribute up to $6,500 to an IRA in 2023, and if you are over the age of 50, you can contribute an additional $1,000 for a total of $7,500 toward retirement savings each year.3
Keep in mind that while your money can grow exponentially while in an IRA, you must carefully follow the withdrawal rules to avoid penalties and taxes. Those penalties and taxes could easily wipe out the extra money you earned through compounding interest.
There are income limits on who can open a Roth IRA. If you are single in 2023 and make $153,000 or more, or married filing jointly and make $228,000 or more, you can’t contribute to a Roth IRA.
Get Rid of Debt
You’re supposed to be saving money for retirement, right? So paying off debt makes good financial sense.
In 2022, the average American household carried debt of $155,000.4 While it might not seem like much, keep in mind that much of that debt might be subject to high interest rates, such as the revolving balances carried on credit cards. Instead of making money on interest by putting that money into an IRA, you’re losing money to creditors every month when you pay the minimums.
Start working right now to get out of debt. A good way to do this is by using the debt snowball method. This is a way of gaining momentum with your money and seeing a solid return on investment as you pay down the debt. Here’s how it works:
· Make a list of all debts and rank them from smallest owed to largest owed.
· Make the minimum payments on everything except the smallest debt.
· Pour as much money as you can into the smallest debt. The goal is to pay it off quickly.
· Once the smallest debt is paid off, go the next smallest debt. Pay that minimum, as well as adding the money you were putting toward the balance of the smallest one that you just paid off.
By doing this, your smallest debts disappear fast, and soon you are putting as much cash as you can toward the bigger debts. Once you are out of debt, all the money you put toward credit card and other debts can be poured into your retirement funds.
In the meantime, do what you can to avoid getting into more debt. This might mean carefully thinking through any new purchases, cutting out expenses where you can, and avoiding higher medical bills by going to the doctor on a regular basis, exercising and eating healthy foods, wearing an affordable medical alert pendant at all times, and focusing on your mental health as you age.
Leverage Your Real Estate
While it’s never a good idea to consider home equity as a primary source of retirement income, most Americans have their savings tied up in real estate. Given that, it might be worth using your home equity to fund living expenses in your golden years. Taking out a home equity line of credit, known as a HELOC, can provide you with ready cash to withdraw from when you need it.
Do you have more than one home? Now might be the time to turn one of your properties into an investment. Talk with a property management company about renting out your home for either short-term or long-term stays. If the price is right, that could be an excellent source of income flowing into your retirement accounts.
You can also choose to downsize. If you have already paid off your home, selling it could give you a very nice profit, which could then be used to purchase a smaller home. If you still owe a mortgage, you might breathe a sigh of relief when you purchase a home with a much smaller debt. Any money saved should always go into your retirement accounts.
In some cases, a reverse mortgage might be a good option. This allows you to receive a monthly payment from the lender, and that payment can help finance your retirement. As an added bonus, the IRS doesn’t see these payments as taxable; they see them as an advance on a loan instead. That can save you even more money.5
A reverse mortgage does mean, however, that the lender owns your home – not your estate. So you can’t leave your property to your heirs. But if you aren’t worried about that situation, a reverse mortgage could work for you.
Talk to Your Tax Advisor
What deductions can you take to reduce taxable income? Large amounts of mortgage interest, business expenses, charitable donations, and excessive medical bills can all be tax deductible beyond the limits of your standard deduction. Keep very good records throughout the year and take them all to a tax professional to determine what you might be able to deduct. The less you have to pay the IRS, the more money you can put into your retirement.
Also keep in mind that certain situations might lead to a higher standard deduction. For instance, those who are 65 or older have a higher standard deduction, and so do those who are legally blind.
Look Into Your Insurance Policies
If you have a life insurance policy, you might be able to cash out the equity in that policy to help fund your retirement. While this should never be relied on as sole retirement income, just as you should never look to real estate or a reverse mortgage to keep you in good financial standing, a life insurance policy might offer enough in a cash-out option to keep you more financially comfortable. Talk to your tax advisor about what your policies are and how you might be able to leverage them.
Plan for Staying Healthy
Budgeting carefully for retirement is a must. But no matter how good your budget is, you can’t control or even predict what might happen in the future. An accident or medical emergency can strike in the blink of an eye, bringing a financial impact.
To that end, look into disability coverage. This might be offered through your employer. You can also purchase it as a stand-alone policy. According to the CDC, one-quarter of all Americans had some sort of disability in 2022, including those that affected cognition, mobility, hearing, or vision.6 As you get older, your potential for disability goes up, and that policy could come in handy to help you protect your nest egg.
Your day-to-day actions can also help ensure your funds are protected. Implementing aging in place solutions right now can help you avoid the potential for injury later. Even if you don’t feel as though you need them yet, it’s a good idea to ensure you can age in place without worry about how you will modify your home after retirement, when income is tighter.
In the interest of avoiding injury, it’s also a good idea to consider a medical alert system with fall detection. Medical alert technology summons help fast in any emergency. That means that you won’t face the dire consequences of what medical professionals call the “long lie,” which is lying on the floor for an extended period of time while you wait for help to arrive.
As you get older and your risk of falls and other accidents increases, it’s a good idea to think about long-term care insurance. The costs of long-term care can be much higher than you might expect. The average national cost of a home health aide, for instance, is $5,148 per month, while homemaker services only can run an average of $4,957.7 And since seventy percent of the elderly will require long term care at some point in their lives, it’s likely that these costs will apply to you.
Long-term care insurance, coupled with the use of a highly affordable personal emergency response system, can provide you with strong peace of mind that your retirement funds can stay in the bank and continue to grow instead of being used to pay for the things you didn’t anticipate. If you’re not sure how much coverage you need, talk to a tax professional or an insurance agent on what it will take to protect your hard-earned retirement accounts. Use these tips and start preparing today!