Saving for retirement, as many experts suggest, should be done as early as possible. Ideally, it should start in your 20s or 30s.
However, the word “early” may not apply to some of us anymore, as there might only be a decade or two left before we join Club 60s.
Compared to Millennials, people with a little nest egg at this stage are at a disadvantage as they find themselves in a dire need to double down on their savings rate.
But whatever your reason is, whether it’s living an unsustainable lifestyle for years, putting siblings through school, paying off huge debts or having to fend off several crises in life, don’t lose hope.
Even as a late starter, you can still catch up on your retirement savings. What is the best way to save for retirement? Here are some tips to do it.
Kick that it’s-now-too-late mentality out of your head
Let’s start with the mindset first because it’s like hacking away at some tree branches to let in some rays of hope. In the case of retirement savings, it’s always “better late than never.” What is too late, though, is fixating at what you could have done in your 20s or 30s. Truth is, if you think you’re late, you are not alone. A research by Employee Benefit Research Institute says 58% of Americans age 55 or older have less than $100,000. Less than 20% have $250,000 in savings. But that’s not supposed to keep you relaxed and procrastinate another year in saving up for retirement. Now is the time to buckle down and work it out.
Maximize your 401(k) contribution
Fund your 401(k) plan as much as you can — this is something you don’t want to skimp on because you are in a race against time. Take a look at your monthly expenses and see where you can make adjustments, from which your 401(k) plan can tremendously benefit. Experts recommend saving 15% of your annual income for retirement. Let’s see what happens if we do that for an annual salary of $50,000. Assuming you are 40 years old and save 15% ($7500) a year and your 401(k) has an average return of 8%, in 25 years your total investment could amount to $578,623. And that goes without employer matching contribution or an assumed annual salary raise yet.
Get a Roth IRA
A Roth IRA is another great way to save for the long-term such as retirement because it gives you the chance to contribute tax-deferred dollars.
Roth IRA has limitations on your contribution, depending on your annual gross income. For example, in 2014, if you are single and have an annual income of less than $114,000, you can only contribute up to the limit of $5,500 ($6500 for age 50 and above), or your taxable income for the year, whichever is smaller.
Consider this. Assuming at age 40 you save $5,500 annually and your Roth IRA has an average return of 8%, at age 65 your investment can potentially grow over $430,000.
Home equity/Reverse mortgage
If you think you won’t be able to reap the benefits of a valuable nest egg when you retire, there are still other options that will help you fund your retirement expenses. A home equity or a reverse mortgage loan are some of them.
In a home equity loan, you borrow against the equity value of your home, assuming you have a considerable amount of equity or ownership. The equity value of your home is your collateral for a home equity loan. Home equity loans, however, may require you to have a good credit history to avail.
Reverse mortgage is another option for funding living expenses during retirement. In a reverse mortgage, you also borrow money against the value of your home, but a repayment of the mortgage is not required, until the borrower passes away or the home is sold.
Some retirees, however, choose to sell their homes and rent in a more affordable place or even move to a different country where their dollars can go farther than if they stay in the U.S. For some, this idea is not acceptable, after saving so hard to own a home, why sell it?
If you don’t like this idea, either, then we recommend taking your 401(k) plan seriously. But you cannot do that if you are currently trying to pay down huge debts.
Pay off high-interest debts
Ah, the rain on your parade. Huge-interest debts such as credit card debts will sabotage your efforts at saving for retirement. You might not feel it right now if you are only paying the minimum amount, but you do not have to wait until later before paying it off.
If you have credit card debts, it will be very difficult for you to fund your 401(k) or Roth IRA to the max. Straight up, how much percentage of your income goes to paying off debts? How much goes to your retirement savings? Do your creditors benefit from your income more than your retirement account does?
If there are ways to fast-track your retirement savings, there are also ways to fast-track paying your debts.
Being a late starter in retirement savings is a disadvantage but you can certainly make up for it with proper mindset and dedication to your savings goal.