If a look at the balance in your 401(k) sparks a midlife savings crisis, take heart: Later is a better time than never to get serious about retirement.
One of the top culprits for underwhelming savings later in life is early withdrawals from individual retirement accounts and employer-sponsored plans like the 401(k) and 403(b), experts say. Whatever your reason for taking out that money, the consequences are clear: A 2015 study by the Center for Retirement Research estimated that early withdrawals erode $69,000 from 401(k) and $25,000 from IRA savings and earnings for the average American.
“There are a number of things that can dig a hole in your retirement savings,” says Patricia Jennerjohn, a certified financial planner at Focused Finances in Oakland, California. “But there’s a number of ways to catch up.”
Here are five tips financial planners recommend to ramp up your retirement savings later in life.
1. Max out your 401(k) or IRA contributions
Everyone can put up to $19,000 of pretax salary each year into a 401(k) or other employer-sponsored plan. But once you hit 50, that annual limit rises to $25,000. Not only can this amp up retirement savings, it also lowers your taxable income for the year by the same amount. Another option is putting money in a tax-advantaged account like a traditional or Roth IRA, which allows contributions up to $6,000 a year; and at age 50, the limit rises to $7,000.
“Whatever you do, increasing your contributions up to the limit is definitely the best place to start,” Jennerjohn says.
That may require some hard decisions on cutting spending to put more of your salary directly into retirement savings. “Challenge yourself to figure out what you could cut back on without cutting down your enjoyment in life,” Jennerjohn says.
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2. Get a raise, a bonus or a refund from the IRS? Invest it all
If your income goes up, put that new money into retirement savings. “When you get behind in your retirement savings, you have to attack it with a single-minded intensity,” says Celia Brugge, a certified financial planner at Dogwood Financial Planning in Memphis, Tennessee. “Whenever you get a bonus or raise or extra cash, put it all there.”
If you’ve already maxed out contributions to a tax-advantaged retirement account, look at other ways to invest — in stocks or in mutual funds — through a brokerage account. “Anything that has the potential for growth beyond just putting that money in a savings account,” Jennerjohn says.
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3. Consider taking risks — but not crazy ones
As retirement age nears, investment portfolios tend to skew toward more conservative investments, like bonds and money market funds, to better safeguard the nest egg. But if your savings remain small, you may want to set your portfolio for growth by having a higher ratio of equities, which carry greater risk but also a greater potential to rise quickly.
“You should not forget that even a 60-year-old may have 30 years to plan for with at least part of his or her money,” says James Kinney, a certified financial planner with Financial Pathways in Bridgewater, New Jersey.
One big caveat: Don’t chase big returns with supposed magic-bullet investments. “Don’t try to make up for lost time by doing stupid stuff like investing it all in some hot stock,” Brugge says. Instead, still strive for a balance of investments among companies, industries and indexes.
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4. Rethink that college fund
Experts like to point out that kids can borrow money for college — but parents can’t take out a loan to pay for retirement. “I’ve told clients point-blank that [your] ability to retire, to be financially independent and not be needy at the end of life, is more important than putting your kids through college,” Jennerjohn says.
This is a dilemma for parents. But with the rising cost of a college education and more parents having children later in life, it may not be possible to fund both your child’s education and your retirement. “I think a lot of people in my generation and younger were put through college through their parents, but that was far less expensive in the 1970s and 1980s [than] it is now,” Jennerjohn says.
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5. Delay retirement a bit
Working Americans born after 1960 will qualify for full Social Security benefits at age 67 — but as an incentive to delay, the government will increase your payments by up to 8% every year until the age of 70.
That may mean working longer than you planned to. “If you delay your retirement savings, you’re delaying your retirement — that’s the hard truth,” Jennerjohn says. “Maybe you retire from your current job but then teach or do something else, but you’ll have to work longer at something.
“Retirement isn’t some goal that if you don’t cross the finish line on time, you’re a failure at life,” she says. “You just have to change your mind about what retirement is actually going to look like.”