Are You Late to Start Investing? Here's How to Catch Up

Ideally, you will begin investing at a young age. But in reality, that often doesn't happen because life gets in the way. That's why the median account 401(k) balance of Americans between ages 40 and 48 is just $34,100, according to data by Fidelity, which is only a fraction of what most people should have by this age.

If you are behind on investing, you shouldn't be discouraged. The fact is, you aren't alone. Many people simply haven't been able to keep up with the ideal investing schedule.

You should take action, though, because you need money for retirement in a 401(k) or brokerage account. After all, Social Security will replace only about 40% of pre-retirement income, and most people must replace 70% at a bare minimum to avoid a huge decline in living standards.

The good news is, there are several different ways to get caught up on your investment goals. Here's what you should do.

1. Figure out how much money you need to invest

Determining how much money you should have invested by retirement is a good first step if you feel like you're behind. You can't really know how much catching up you have to do until you know where you stand relative to where you should be.

A good rule of thumb is that you'll want to have about 10 times your final salary saved by the time you retire. Figure out what that will be by estimating years to retirement and assuming a 2% raise annually. So, if you make $40,000 this year, assume you'll make $40,800 next year, and $41,616 the year after that, and so on until retirement.

Once you have an idea of how much you'll need to invest for your future, you can use the retirement calculator at Investor.gov to tell you how much you need to put aside each month to get caught up by retirement age. This will depend on your timeline and projected rate of return.

Say, for example, you are 40, have $34,100 saved, and want to retire in 25 years with $600,000. If you assume you'll earn a 10% average annual rate of return, the calculator would reveal you must invest $195.34 per month for the next 25 years to be on target to retire with your desired amount.

2. Build your budget around your desired savings rate

Once you've figured out how much you need to invest to catch up, you'll need to budget to ensure you're hitting your monthly target. This can be easier said than done, especially if you end up discovering you need to save $1,000 a month or some other high number.

Look carefully at what you can cut and how you can increase your income to make sure you're investing enough to get caught up. Some steps you can take include:

• Taking on a side hustle: The average side hustle produces $483 monthly, which is a pretty good amount of money if you need to get caught up on savings. Even if you have $0 invested and you're 40, investing $483 monthly would give you $570,019.56 by age 65.
• Cutting fixed expenses. If you can reduce a big cost consistently, you can redirect that money to investing. Say, for example, you opt to drive a used car instead of a new car. The average monthly payments on a new car were $703 in 2022, while the average payments on a used car were $565. If you can invest that $138 per month you'd save by opting for used instead of new, this could help you hit your savings target.
• Refinance debt. If you can reduce the cost of your credit card bills or other debts, you can save extra money for retirement. A debt consolidation loan will allow you to pay off multiple debts and leave you with only one monthly payment to look after. You can also often lower your interest rate by going this route, as the interest rates offered by debt consolidation loans tend to be lower than what you'll find on credit cards.
• Track spending and budget carefully. You may find you can reduce spending on things like dining out and streaming services and find enough money to hit your target.

If you find that you are not able to cut spending or increase your income enough to save the amount you need to get back on track for retirement savings, you may need to make plans to delay your retirement so you have more time to save.

3. Take advantage of tax breaks

Tax breaks can help you get back on track with investing as well, since contributions won't cost as much if you are getting a tax break for them.

Say, for example, you need to save $483 per month but you put the money into an IRA at your brokerage firm and can deduct the contribution. If you are in the 22% tax bracket, this could save you as much as $106.26 on your taxes so your taxable income would only be reduced by $376.74.

The good news is, tax-advantaged retirement plans like IRAs and 401(k)s allow older investors (those over 50) to make extra deductible contributions called "catch-up contributions." So, while a younger person can contribute only $22,500 to a 401(k) and $6,500 to an IRA for 2023, anyone over 50 could put an extra $7,500 in their 401(k) and an extra $1,000 into an IRA.

If you have access to a 401(k) at work and you get an employer match, you should make sure to contribute enough to get the maximum. This employer match is free money, and since your company is putting money into your account too, you won't have to contribute as much to hit your goal.

By taking these three steps, hopefully you can get caught up even if you are behind on investing. It will require some sacrifice, but better to make those spending cuts now by choice rather than later when you're retired and have no options.