If you're one of the millions of Americans who are on the other side of 40 and don't yet have a substantial retirement nest egg, don't despair. It's not too late, but you need to implement some strategies that will put you back on track.
Estimate How Much You Need in Retirement
Roughly estimate how much money you'll need to live on in retirement. Don't get bogged down by conflicting advice on how to calculate the amount. A ballpark figure is a good starting place. Consider using a retirement calculator to help you determine how much you'll need to have in place.
Calculate Your Income Sources
Once you have an idea of how much you'll need for retirement, calculate what will be available from sources other than your savings. For example, what is your expected Social Security benefit at retirement age? Do you or your spouse have a pension from a previous or current employer? If you have a 401(k) plan, what is its expected value at your planned retirement age? Use a conservative rate of growth to avoid overestimating.
Set Financial Goals
Set goals for reaching the amount you'll need to make up the difference between Social Security, pensions, and any other retirement funds you already have.
Max Out Your 401(k)
If your employer has a 401(k) or 403(b) or other voluntary contribution retirement plan, and you're not already participating, sign up today and try to contribute the maximum allowed by law. Remember that the tax savings on your deductions will soften the blow. If you're in a combined federal and state income tax bracket of 35%, your contributions will only cost you 65 cents for every dollar you put into your account. Review the 401k and Retirement Plan Limits for this tax year and also consider making "catch-up" contributions.
If your employer matches a percentage of your contribution, that's free money you should never pass up. Add your employer match to your retirement contributions, and you'll have a tidy additional sum of approximately $364,000, assuming a 50% employer match, for a total of well over one million dollars.
Go for the Roth
If you make under the income thresholds, you can contribute to a Roth IRA in addition to your 401(k) or 403(b) plan. The contribution is not tax-deductible, but the earnings will be tax-free in retirement. The maximum contribution to a Roth IRA in 2020 and 2021, if you're under 50 years old, is $6,000 ($7,000 if you're over 50). $6,000 a year would grow to just over $288,000 in 21 years assuming a 7% rate of return, and you will owe no taxes on any earnings in your Roth IRA.
Don't Be Too Conservative
Even at 45 or 50 years old, you have several decades for your retirement earnings to grow, so invest a large percentage in carefully researched, proven stocks, or, better yet, mutual funds.
Consider Relocating or Downsizing
If you live in an area with a high cost of living, moving to a less expensive area and investing your savings for retirement could make a big difference in your ability to amass a nice nest egg.
If your kids have left the nest and you're still living in a big house that has appreciated, consider selling it and buying a smaller, less expensive home. You'll save not only on your mortgage payment, but in less obvious places like the cost of heating, cooling, insuring, and repairing your home, property taxes, etc. You can sock all the savings away for retirement or use some of them to enjoy your life now.
Take on a Second Job
If you're worried about ever being able to amass enough money to retire, consider taking on a second job and investing your earnings.
The tax laws now allow those over 50 to contribute a little extra to 401(k)-type retirement plans and IRAs, so they can do a little catching up as they near retirement age. Take advantage of this if you're over 50.
Pay Off Debt
If you carry thousands of dollars of credit card balances and pay the minimum payments each month, your potential retirement savings are going directly to your credit card company in the form of interest. Paying only the minimum payment on credit cards is one of the worst financial mistakes you can make. Start applying as much as possible to your credit card balances, and once they're paid off, resolve to pay the balance in full each month. You'll be amazed at how much money it frees up for retirement savings over time.
The older you are when you start seriously saving for retirement, the harder you'll have to work at it, but it can be done by following the advice above, so don't let doubt or discouragement keep you from starting right away, regardless of your age.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.