If you're feeling unprepared for retirement, you're not alone. According a study by the U.S. Government Accountability Office, nearly one-third of households led by those 55 and older have no retirement plan savings at all. However, it's never too late to save for retirement. Remember, your retirement investment time horizon is your life expectancy, not your retirement date. Here are four strategies to catch up on retirement savings.
1. Take advantage of retirement plan catch-up provisions
I'm looking forward to turning 50 years old in a few years. It's not because I'm particularly excited about being half a century old; it's because I'll be able to save more money because of the tax provisions for retirement catch-up savings.
Both individual retirement account (IRA) and defined contribution plans such as 401(k) plans allow savers over 50 years old to make catch-up contributions into retirement accounts. The contribution limit for 2017 for IRA plans is $5,500. Savers over 50 can contribute an additional $1,000 toward IRA accounts for a total of $6,500 per year.
The benefit for defined contribution plans is even better. Currently, the IRS allows defined contribution plan participants to contribute $18,000 into their accounts, and catch-up contributions for plan owners over 50 is an additional $6,000. Therefore, you can contribute a total of $24,000 into your defined contribution plan.
Since many people over 50 are in their peak earning years, it's a great time to sock away extra earnings into these tax-advantaged retirement plans. Even if you plan to retire soon, these investments can continue to grow for many years into your retirement.
2. Cut expenses and pay off debt
If you're behind in your retirement savings, it's time to trim unnecessary expenses so you can save more money.Lower financial support to adult children or don't let them live rent-free in your home. Analyze your budget and cut expenses. For example, have you reviewed your credit card for automatic renewals for subscriptions you no longer use? Have you considered raising your insurance deductibles to reduce the cost? Can you reduce the number of times you dine out during the month? Trim expenses for daily living and invest the difference or use the extra cash to pay off debt.
If you have credit card debt, pay more than the minimum payments. Consider transferring higher-rate balances to low- or no-interest cards, and set a goal to pay off the balance during the low introductory interest rate period. For other debt payments, request a lower interest rate if you've made payments on time. If you plan to stay in your home during retirement, make extra payments to pay off the mortgage faster. You'll save thousands in interest payments.
3. Delay full retirement
Delaying retirement has the dual benefit of delaying the number of years you'll need to live off of retirement savings and providing additional earning years to save. If you continue to work, you can continue to contribute to your company's defined contribution plan and increase your retirement savings. Working longer may also increase your social security benefit since your final work years are frequently your highest earning years.
Some companies, and even some federal government agencies, are now offering a phased retirement option. This program allows workers to shift to part-time employment while retaining other benefits. According to a survey from the Society for Human Resource Management, 30% of companies that have strategies to retain older workers have phased or gradual retirement programs for them. These programs allow older workers to start the transition to retired life while allowing their company to bring on younger workers who can benefit from the mentoring of these experienced employees.
Some seniors may choose to retire from full-time employment but work part-time. Seniors may be able to use part-time work to explore an interest in another field, provide structure and meaning to the day, and provide additional income for living expenses.
4. Utilize the equity in your home
For most seniors approaching retirement, home equity is their largest store of savings. Homeowners can access home equity by downsizing or getting a reverse mortgage.
Downsizing can be a great solution for accessing home equity and reducing ongoing expenses in retirement. Studies show that taxes, insurance, upkeep, and utilities account for nearly 30% of retired homeowner expenditures. Downsizing can cut many of these expenses.
A reverse mortgage may be a good option for homeowners who want to use their home's equity but don't want to move. Homeowners can use a reverse mortgage to access equity as a lump sum, a line of credit, lifetime payments, or a stream of payments for period of time.
While both downsizing and reverse mortgages can be time-consuming and have fees and closing costs, either can be a great source of income for some retirees.
It's not too late
If you're behind in your retirement savings, it's not too late to make a big impact on the money you'll have for retirement. Utilize the retirement plan catch-up contributions in your direct contribution plan or IRA. Cut expenses and use the extra funds to invest or pay off debt. Consider delaying full retirement and continue to work full-time or part-time. You may also choose to use the equity in your home by downsizing or using a reverse mortgage. The sooner you make changes, the more money you'll be able to save.