Putting off saving for retirement until you're decades into your career is one of the most common financial planning mistakes people make. By missing out on saving even modest amounts early in your working years, you miss the opportunity to put time on your side rather than making it an enemy.
But even if you've fallen into the procrastination trap, it's not too late to take steps to improve your retirement prospects. Later in this article, I'll share a few tips for late-starters to consider in building up their retirement portfolios. First, though, let's take a look at why retirement-savings procrastination is so common.
Tomorrow is always a day away
If retirement were the only thing you ever had to save for, then it'd be a lot easier to focus on such a faraway goal. But in the real world, everyone has numerous financial priorities, many of which require a more immediate time frame and therefore more short-term attention. Consider:
- When you get your first job, you may have tens of thousands of dollars in student loans and other debt to pay off. When you're in debt and fighting for financial survival, saving for retirement is a luxury you can't afford to think about.
- After years of struggling to get debt paid off, once you succeed, it's easy to turn to long-delayed wishes with your newfound cash flow. Buying a car or a home requires substantial up-front cash, especially with tight mortgage requirements, draining resources that might otherwise go toward retirement.
- If you start a family, then saving for retirement will constantly compete with your child's needs. All too often, people focus on child-related expenses like saving for college to the exclusion of their own retirement, leaving them in desperate need of catching up.
So if you've gotten yourself into this boat, don't feel bad -- but don't give up, either. Here are three tips to hold on to as you seek to achieve the best retirement you can.
1. Save, save, and save some more.
There's a reason that the IRS has higher limits for retirement contributions when you reach age 50. The tax laws even refer to those higher limits as "catch-up contributions," understanding full well that many near-retirees put off saving for retirement until the last possible moment.
If you're fortunate enough to have established yourself well in your job, the last years of your career can be some of the most lucrative. Between high salaries and the usual reduction in household expenses with children having grown up and left home, you have the capacity to save a lot more than you could have in previous years. Take full advantage of that by saving as much as you can.
2. Build your investing savvy.
The benefit of starting to invest early in life is that you have time to make mistakes. That's not true if you're getting a late start, so it's essential to get smart about investments.
Typically, a broad-market asset allocation approach can get you most of the way toward your retirement goals if you have a long enough time horizon. But with fewer years between now and your last day of work, you have to pay a bit more attention to particular investing trends in order to avoid getting trapped in a down cycle for a particular market.
For instance, right now, you'll find wide disparities among forward earnings multiples for various industries. On one hand, according to figures from Yardeni Research (link opens PDF file), forward multiples for tech stocks have fallen to near their late-2008 levels, and telecommunications stocks have some of the highest forward P/Es in the market, with Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Cisco Systems (NASDAQ:CSCO) all trading at less than 10 times forward earnings estimates.
By contrast, utilities, which are often seen as safe investments for retirees and near-retirees, generally have much higher multiples, with Duke Energy (NYSE:DUK) and Southern (NYSE:SO) near 15 times earnings despite having less extensive growth prospects.
When you have decades to invest, these valuation disparities tend to even out. But with a five-to-10-year time frame, you can't afford to ignore valuations.
3. Discover cost-cutting.
Most retirement experts focus on investing as the key component of retirement security. But reining in spending is just as important, and getting a head start on doing so before you retire will make the adjustment a lot easier.
Whether it's using coupons, searching out discounts, or merely cutting back on unnecessary items, every dollar you cut your spending budget by is another dollar that can go toward saving -- and one fewer dollar you'll need on an ongoing basis both now and after you retire.
You can do it!
If you've decided that now's the time to work toward a better retirement, congratulations! You may face a tough uphill climb, but the effort will be well worth it in the long run.