Many people do things they regret when they were younger. For people in the latter stages of their careers, a common regret about their youth is not saving enough and planning for retirement.
While you can't turn back the clock, there are a number of things you can do to make up for lost time so your retirement savings have a chance to catch up. Here are six methods for catching up on retirement contributions:
- Adjust your retirement calculator assumptions
A good place to start if you want to catch up on retirement contributions is to take a fresh look at a retirement calculator to see where you stand.
Retirement calculators are generally based around five key variables:
- An investment-return assumption
- An inflation-rate assumption
- An annual retirement-savings goal
- The projected number of years to retirement
- An annual retirement spending allowance
While a retirement calculator may allow you to change the first two variables, doing so may be little more than wishful thinking. After all, you can't earn better investment returns or slow down the pace of inflation just by putting more optimistic assumptions into the calculator.
The fifth variable, the annual spending allowance, will reflect the reality you'll be left to deal with given the retirement saving course you are on. To try to improve that reality, the place to focus is on the third and fourth variables -- boosting annual contributions, and perhaps lengthening the time you have to save for retirement.
The following tips address some possibilities for altering those variables, but a retirement calculator is a good tool for setting a course and keeping yourself on track.
- Take advantage of 401(k) catch-up contributions
The standard 401(k) contribution limit has been raised by $500 for 2019, to $19,000. On top of that, if you are aged 50 or over you can make an additional catch-up contribution of $6,000.
This puts the potential total annual contribution for people aged 50 or over at $25,000 -- certainly a healthy pace for starting your catch-up contributions.
If you can't afford to contribute that much, at least strive to increase your 401(k) contribution this year and each subsequent year of your career. At minimum, make sure you are contributing enough to earn the full employer match available to you.
- Make catch-up contributions to your IRA
Like 401(k) plans, IRAs allow catch-up contributions for people aged 50 or over. Both the standard contribution limit and the catch-up contribution are much smaller than for 401(k) plans, but every little bit helps.
The standard IRA contribution limit for 2019 is $6,000 and the catch-up contribution amount is $1,000, making the total potential contribution for older workers a total of $7,000. These limits apply to both Roth and traditional IRAs.
IRA contributions don't have to be made until your taxes for the applicable year are due, so this might even give you a few extra months to catch up on last year's contribution before turning your attention to the next year.
- Use a Health Savings Account (HSA) to supplement retirement saving
If you participate in a high-deductible health plan through your employer, then you are also eligible to participate in an HSA.
HSAs can be used for more than just paying immediate medical expenses. You are allowed to accumulate money in an HSA over time, and the money you contribute plus any investment earnings are never taxed as long as you use the funds to pay qualified medical expenses.
HSA contribution limits for 2019 are $3,500 if your health plan covers just yourself, and $7,000 if you have family coverage. There is also a $1,000 catch-up contribution allowed if you are aged 55 or older (note that this is different from the age of eligibility for 401(k) and IRS catch-up contributions).
- Push back your retirement date
If you crunch the numbers on a retirement calculator and conclude that there is no way your retirement savings will get caught up by your planned retirement date, consider working longer.
After all, people are living longer than in generations past, yet their retirement planning still reflects the same old assumptions about what retirement age is. Working past age 65 not only may be more in step with today's longevity, but it has a doubly beneficial impact on retirement wealth.
Retiring later not only gives you extra years to save for retirement, but it also reduces the number of years when you will be living off your savings. Basically, every year you delay retirement means trading one year of spending for an extra year of saving. That should lead to a more comfortable lifestyle when you eventually do retire.
As a middle ground, consider semi-retirement after your normal retirement date, as a way to earn a little extra income and ease the burden on your retirement savings.
- Reconsider your social security strategy
Another benefit of working longer is that it may allow you to rethink your approach to claiming social security benefits.
You can claim social security as early as age 62, but every year you delay collecting those benefits (up until the age of 70) means you are entitled to a larger annual benefit. So, pushing back starting to claim social security in favor of ultimately receiving a larger annual benefit could help make up for inadequate retirement savings.
As long as you are still working, you still have time to boost your retirement savings. Make that the foremost goal for the remainder of your career and you can improve your chances to get caught up.
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