Have a mortgage, older kids but little to no retirement savings? Alas, that's not unusual: In 2016, the average American ages 50 to 55 had retirement savings of only $11,000, according to The State of American Retirement Savings, a report from the Economic Policy Institute.
While “the earlier, the better” is true for investing, it’s never too late to begin, advisors say. Twenty-plus years to invest toward retirement is still enough time to enjoy the benefits of compound interest.
“Given longevity, people in their 40s and even early 50s have a much longer investment time horizon than they may realize,” says Robert R. Johnson, finance professor at Creighton University in Omaha, Nebraska, and co-author of “Investment Banking for Dummies.”
“It’s really easy to feel defeated and there’s no need — you still have time,” says Pam Krueger, CEO of Wealthramp in Belvedere, California, and co-host of “MoneyTrack” on PBS. “It’s about getting your mindset in the right place. Sometimes, getting started means getting out of that experience of feeling paralyzed.”
NerdWallet asked 15 financial advisors about the key steps required to make a late-in-life start in investment savings. Here are the common themes that emerged:
Budget for savings
A repeated mantra from financial advisors is building the habit of “paying yourself first.”
“Most people budget, or at least implicitly budget, for house payments, food, car payments and utilities, but few people budget for savings,” Johnson says. Paraphrasing famed investor Warren Buffett, he adds: “Do not save what is left over after spending; instead spend what is left over after savings.”
Many experts suggest meeting with a fee-based financial planner to help look at how expenses can be pared and debt prioritized, starting with any high-interest credit card debt. Once credit card debts or consumer loans are paid off, shift that monthly amount toward building your nest egg.
“You are already used to not having that money around, so take the amount of the loan and continue to pay it, but reallocate it into retirement savings,” says Dan White, founder of Daniel A. White & Associates, a retirement planning firm in Glen Mills, Pennsylvania.
“We’d give late-to-the-table investors the same advice we give long-distance runners: ‘Lose a little weight and run a little bit faster,’” says Paul Tyler, chief marketing officer at Nassau Financial Group in Port Chester, New York.
“Losing weight means living in a less expensive manner so you can save more money,” Tyler says. “Many of us have saved money during the pandemic by changing how we live, eat, and entertain ourselves.
“Take this opportunity to make those changes permanent.”
Start or increase employer-sponsored retirement contributions
A universal recommendation from all advisors we polled: If your employer offers retirement benefits such as a 401(k), look to increase your contributions — certainly up to your employer’s matching contributions.
“Perhaps the worst financial mistake anyone can make is turning down free money,” Johnson says.
“Many people put such a high priority on other financial goals, like saving for a child’s college or paying down loans, that they don’t participate in their company 401(k) plan,” Johnson says.
Beyond cash savings, employee contributions reduce your taxable income and lower tax bills.
For 2020, the IRS allows up to $19,500 of your income to go into a 401(k). For investors ages 50 or older, the IRS allows a catch-up contribution of an additional $6,500.
“Use raises or bonuses as opportunities to increase your retirement savings,” suggests Ryan Johnson, director of portfolio management and research at Buckingham Advisors in Dayton, Ohio.
If you don’t have an employer-sponsored retirement program or have already maxed it out, another option is to open a traditional individual retirement account, or IRA. Doing so allows you to put away $6,000 of your income tax-deferred until retirement; the limit increases to $7,000 if you’re age 50 or over. Self-employed workers have other retirement plan options with higher limits, such as a solo 401(k) or SEP IRA.
“Even if you cannot max out your retirement plan contributions in your first year of investing, make it a goal to get to the maximum contribution limits within the first three or four years of investing,” suggests Kevin Driscoll, vice president of advisory services for Navy Federal Financial Group in Pensacola, Florida. “You will be glad you did.”
Pick funds, not stocks, and automate investments
New investors may think picking hot stocks may be the key to building wealth through the stock markets, but financial advisors suggest putting cash in mutual funds, index funds or exchange-traded funds instead. Rather than placing bets on a few stocks, these funds invest in a diversified portfolio of companies.
“People should begin investing in a low-fee, diversified equity index fund and continue to invest consistently, whether the market is up, down, or sideways,” Robert Johnson adds.
Financial advisors also suggest automating regular contributions into your IRA or other investment funds.
“You can't rely on willpower,” says Earl E. Rubinoff of the Rubinoff Group in Deerfield, Illinois. “You need forced savings.”
“The key to success when starting an investment plan is to automate the process as much as possible,” says Ryan Hughes, founder of Bull Oak Capital in San Diego. “Even if you are starting with $50 per month, automating the process will make you far more successful over time.”