By the time you reach the age of 50, you should have around six times your salary invested for retirement. This will enable you to stay on track to have around 10 to 12 times your final salary by retirement age, which is a good estimate of how much you'll need to retire.
The problem is that not everyone has achieved this milestone. In fact, many people are behind on investing for their future. The good news is, there are things you can do if you're one of those people.
If you are behind on retirement savings, here are some steps you can take to get back on track.
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1. Figure out how much you need to save to catch up
If you're 50 years old and have less than six times your salary saved, you need to figure out exactly what you must invest to try to catch up. Otherwise, you can't solve the problem of a potential retirement shortfall.
Fortunately, it's easy to find out. Investor.gov has a savings goal calculator you can use. Input the details about how much you currently have saved as well as your ultimate goal -- which should be around 10 to 12 times your final salary. For example:
- Say you make $50,000 right now and have 15 years until retirement. Assuming you get a few raises (which typically average about 2% a year), your final salary might be around $66,000, so you'd need around $660,000 if your goal is 10 times your final salary.
- If you have only $100,000 saved right now and you expect to earn 10% average annual returns, the calculator will reveal that you need to invest around $635.44 per month to hit your target.
You can do this calculation based on your own specific financial situation to find out exactly what you need to save each month to get caught up.
2. Cut expenses or increase your income to hit your target goals
After figuring out how much to save, you'll need to find that money in your budget. There are two ways to do that. Increase your income or decrease your expenses.
The easiest way to cut expenses is to find one big fixed expense to reduce, like lowering your car payment by trading your newer vehicle in for a cheaper used car. You can also try chipping away at little expenses, like cutting dining out or your daily coffee, but this is harder to sustain.
If you can't find enough expenses to cut to save the necessary amount, you can try increasing your income. Working a side job a few hours a month or negotiating for raises can help make that happen.
3. Automate your savings
After adjusting your budget to find the money, you need to save to get on track for retirement, you'll want to make sure you actually invest those funds every month. Automating the process increases your chance of success because the money goes where it needs to effortlessly.
If you have a workplace 401(k), sign up to have the money taken from your paychecks. If you are investing in an IRA with a brokerage firm, you can arrange to have the money moved from your bank account on payday.
4. Take full advantage of the available tax breaks
Finally, choosing tax-advantaged retirement accounts to invest in, such as a 401(k) or IRA, can help make it easier to save.
The tax breaks you get by investing in these accounts mean that each contribution won't reduce your take-home income as much. For example, if you make $5,000 in tax-deductible contributions to an IRA and you're in the 22% tax bracket, you could save as much as $1,100 on your taxes.
By taking these steps, you can still hit your ultimate retirement savings goal even if you've fallen short of having six times your salary by 50. Just be sure to get started on the path to success ASAP because the longer you wait, the harder it gets.
