All the advice you see about starting to save money for retirement as early as possible. But what if you had a late start? What’re the best ways to save for retirement when you’re starting in your 30s, 40s, or 50s? Break out your retirement planning spreadsheet, and let’s talk about what retirement strategies you need to catch up.
Best Ways to Save for Retirement
Using a retirement vehicle to reach your goals is a great strategy to leverage when saving. Individual retirement accounts are tax-advantaged investing tools that are designed to help people save money for retirement. IRAs have several different types, including a traditional IRA, Roth IRA, SEP IRAs, and SIMPLE IRAs.
One of the most popular IRAs is the Roth IRA. With a Roth, you contribute money that has already been taxed. Hence it’s not tax-deductible, but the money will grow tax-free, and when you start withdrawing, there are no taxes. You can continue to contribute to a Roth as long as your income-eligible, regardless of your age.
The contribution limits on a Roth are set by the IRS each year. For 2021, the maximum amount you can contribute is $6,000. For those who are 50 or older, there’s an additional $1,000 of “catch-up” contributions too. If you had a late start on retirement savings, then it’s ideal to take advantage of this catch-up contribution. The one caveat of this retirement account is that you can’t contribute if you make more than the modified adjusted gross income amount. For single taxpayers, this amount is $139,000, while for married filing jointly, it’s $196,000.
A traditional IRA is very similar to a Roth, with some key differences. Your contribution limits are the same: $6,000 per year, up to $7,000 if you are 50 or older. Your contributions are tax-advantaged, which means you don’t pay taxes on them until you start withdrawing them later. Since these contributions lower your adjusted gross income, you might qualify for other tax incentives as a result.
Contributions to a traditional IRA can be made by anyone younger than 70 and a half who has earned income. They do have what’s called required minimum distributions. RMDs, as they are called for short, require taxable withdrawals of your account. Whether you need it or not, these withdrawals start when you turn 70 and a half years old.
An employer-sponsored retirement savings plan, such as 401k investments, is another great way to boost retirement savings. It allows you to put a portion of your pre-tax dollars into a retirement account. You don’t have to pay taxes on 401k investments until you start withdrawing money. There are several options on how to invest money among stocks, bonds, and money market investments. Target-date funds are a popular option because they become more conservative as you come closer to retirement.
Retirement Savings By Age
You must make saving a priority where you started on your retirement budget early or not. As you get older, more limitations come up. For example, you might have to delay your retirement for several years to have enough savings that you will need. You will have to adjust your retirement strategies based on when you get started. Here’s a look at what to consider based on retirement savings by age you begin.
Saving for Retirement at 30
Luckily, if you’re in your 30s, you have more time than you might think. You have another 30 years of saving and time to get the benefit of compounding even if you start at age 35. It is usually the time that life gets more complicated too. You’re probably married, have kids, and looking into buying a house. It’s also likely that you’re still paying on student loans.
Find a balance between paying off debt like student loans and credit card debt and saving for your retirement goals. Take advantage of 401(k) or a traditional IRA that allows you to contribute pre-tax dollars. That way, if you’re on an income-driven student loan repayment plan, that will lower your student loan payment. Other tips to consider are:
- Maximize your 401(k) contributions – You can contribute $19,500 per year to this employer-sponsored fund. Put your raises towards your savings instead of having more spending money.
- Be aggressive in your asset allocation – In your 30s, you should have a rather aggressive investment plan. Sock away 80 to 90 percent of your assets in your investments into stocks. You have more time to weather the storm, and in the long-term, this will work out to your advantage.
- Rollover your 401(k) when changing jobs – Don’t cash out of a 401(k) when you leave an employer. You will pay a 10 percent penalty plus income taxes. Instead, use a rollover 401(k) to move those funds when you leave. Consider your employer’s vesting structure too. For example, if you are fully vested after two years to receive your employer’s contributions and have been working there for 18 months, it might be worth it to wait it out.
- Use a 529 Plan for your kids – It’s never too early to think about college. If you plan to help fund your child’s college expenses, then start 529 savings as soon as possible. This tax-advantaged savings plan can be used for a college education or even tuition at an elementary or secondary school.
Saving for Retirement at 40
You have a lot of ground to make up for here, so you will need to invest more aggressively than others your age. Take advantage of a 401(k) if you have access to it, especially if there’s an employer match. Use a Roth individual retirement account if you’re eligible too, so you don’t have all your eggs in one basket.
Working longer isn’t the only answer to make up for saving for retirement at 40. You will have to put other goals like funding a child’s education on the back burner. Other suggestions for those who are 40 include:
- Start budgeting – Get a handle on your monthly expenses with a budget. Find areas where you could scale back on costs such as eating out and entertainment. Make sure to add your retirement goals and allocate funding for that each month.
- Reduce debt – Other than your mortgage, use this time to get focused on paying down those high-interest loans so you can free up more of your money. Two popular methods of tackling debt are the snowball and avalanche method.
- Build an emergency fund – It’s hard to invest in retirement if an emergency happens and side rails your financial plans. Build up enough money to cover your expenses for three to six months in case something happens.
Saving for Retirement at 50
When you reach your 50s, you need to get into gear to build retirement savings. Review all your expenses – mortgage, car payments, college tuition, etc. Look for things you can cut. Pay off as much debt as possible. Boost your contributions to your 401(k) by putting in as much as you possibly can. If you have an IRA account, maximize your contribution by taking advantage of the “catch-up” amounts each year.
Other tips for individuals who are 50 and older and are savings are as follows:
- Set realistic goals – Use a retirement calculator or work with experts if you need help reviewing your savings goal. Sit down and really figure out how much you will need based on the expenses and lifestyle you want to have.
- Pay off debt – A big hurdle that might be in your way to saving is having debt. Take care of any lingering credit card debt, student loans, etc., that you have. If all you have left is a mortgage, then get that taken care of. Without a mortgage, more of your money can be put towards saving and investing.
- Use Social Security to your advantage – You can start taking Social Security at age 62. But delaying it will increase the size of your monthly benefit. Also, if one spouse outlives the other, the Social Security benefit that’s larger is kept by the surviving spouse.
- Get other income streams – Increase your earning so that you have more money to put towards retirement. Sides hustles are popular nowadays, and it’s relatively easy to get started on opportunities like teaching online, ride-sharing, etc.
Work with Retirement Plan Consultants
If you’re starting your retirement savings in your 40s or 50s, it might be best to work with some experts. Retirement plan consultants are specialists who have experience in plan administration and management related to retirement goals. They can help you with your retirement planning spreadsheet by focusing on the solutions that will meet your needs. It would be best if you had a plan when it comes to retirement savings. Get help from advisors who have helped others in your shoes and rest a little bit easier.