James C. Gunter
Some people approach retirement with excitement and security because they were able to save a lot of money early in their career for retirement, but not everyone is that lucky. For many people in their 40s and 50s, you may just now be reaching a point in your career when you’re earing enough to put away serious money for retirement. But what if you have no retirement at 60? Can you save enough? What’s the best way to save and invest? How can you get the most out of social security?
If you’re asking these and similar questions, this article is for you. We’ll talk clearly and simply about what you can do at this point in your life to maximize your efforts and reach retirement in the best possible financial shape. Here are six pieces of advice to follow that can help.
One of the worst ways to start saving for retirement is to save without a goal in mind. Simply squirreling away an indeterminate amount of money each month and hoping for the best isn’t going to give you good results. The first thing you’ll need to do is assess your retirement goals. Primarily: How much will you need to live on a yearly basis? If you have a combined income of $150k a year right now, how realistic would it be for you to downsize your current lifestyle? Could you live on $50k a year? How about $30k? Knowing how much you need to live on will give you a goal to save for.
For example, if you’ve saved $300k and expect a 4% yearly capital gain on that money to live on, that’s only $12k a year. That’s probably less that you may have been expecting. Of course, when you combine your $12k with social security payments that might be enough to live on, but it’s a far cry from the $150k salary you may be enjoying right now.
An exercise you may try in order to determine if you are financially ready for retirement is to live for a month on what you expect to be earn monthly when you retire. Is it enough to pay your bills and groceries? Will it allow you to travel or participate in the hobbies and activities you were planning on in retirement? Also, keep in mind that your health care expenses will increase as you age and will become a larger part of your yearly expenses—especially after 65.
So what happens if you run this exercise and realize you may not have enough? These next tidbits of advice will help you out.
The best way to get more money in your retirement accounts is to save as much as possible right now. There are two primary ways to do this, and they go hand in hand. First, lower your cost of living and funnel all the savings into your retirement. One of the biggest expenses you can downsize is your home. If you’re an empty nester, you many not need the extra space anymore and may be able to downsize to a home with a lower mortgage and utility payments. If possible, sell your home and pay cash for a smaller, cheaper home which will save you tens of thousands of dollars every year. You can also reign in your budget to cut out extra spending you don’t need, like eating out, going to movies, and other unnecessary costs. Tightening your belt doesn’t sound fun, but you’ll appreciate it later when you have a comfortable retirement.
The second way to increase your savings is to take advantage of “catch-up” payments for people over 50. Although you can always contribute as much as you want to your 401k, the IRS allows your contributions to be tax free up to a certain allowable amount. For example, in 2017 the maximum tax-free contribution for a traditional IRA is $5,500, but if you’re over 50, you can make catch-up payments of an extra $1,000 each year. For a Roth 401k, the standard maximum contribution is $18,000, but it’s $60,000 if you’re taking advantage of catch-up payments! For a more comprehensive list of contribution limits, use this list.
The bottom line? If you want to retire with more money in the bank, figure out ways to lower your cost of living and increase your retirement payments.
Although you may be tempted to draw on social security when you’re eligible at 62, delaying social security does two things:
You’ll increase your payouts by about 8% each year you delay taking payments until age 70 (at which point, the payments won’t increase). That’s a significant increase that will affect your payouts for the rest of your life. Additionally, consider that social security benefits are calculated by averaging your highest-earning 35 years of work. If you continue to work until 70, those extra high-earning years could figure into your calculation, further boosting your eventual payout.
Remember earlier when we said that your health care costs will most likely go up after 65? You can prepare for those expenses now by increasing your payments to a health savings account (HSA). The great thing about HSA contributions is that they are tax-free going in and tax-free going out as long as they are used for qualified medical expenses.
Keep in mind, once you reach age 65 and enroll in Medicare, you can no longer contribute to your HSA tax free, but you can still withdrawal from it tax free. Additionally, there is no capital gains tax on money in an HSA, so all your interest is tax free too. Some HSA accounts even allow you to invest a portion of the account in order to yield a higher return—again all tax free. And although there are yearly limits on how much you can contribute to an HSA (which you can find out more about here), catch-up payments of an extra $1,000 per year are allowed for people over 55.
You’ve probably worked for several employers over the years, and you may have orphaned 401ks left over from those jobs. Now is the time to consolidate those funds. Combining all your disparate accounts will help you form a tangible sense of where your money is, how much you have, and the amount of interest and growth you’re earning on them. Not only is it easier to keep track of, but taking lower yield 401ks and combining them with higher earing accounts will increase your total earning power.
This may seem like a no-brainer, but it’s imperative that you get out of debt as quickly as possible, so you can put those funds toward your retirement instead. If you are still making car payments, consider downsizing by paying cash for a used car. If you have large debt from credit cards, medical bills, or other emergencies, research debt consolidation programs that will allow you to consolidate and lower your interest rate so you can pay everything off faster. The quicker you can get out of debt, the more money you’ll be able to invest in your future and contribute to a more comfortable retirement.
Even if you haven’t saved a lot for retirement right now, there is still time to increase your nest egg if you follow the strategies suggested above. With a mixture of saving, smart spending, and taking advantage of special tax rules for people over 50, you can get back on track and build the retirement you’re dreaming of.
Copyright © 2019 James C. Gunter