Check out these four tricks used to get you to spend more (without you knowing it).
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While it’s not likely that anyone plans to get behind on their retirement savings, the reality is that a lot of us are.
By the time you reach age 50, it is usually painfully clear just how behind you really are. Fortunately, that’s also the age at which you can bulk up your retirement savings—$6,000 more per year in your 401(k) and $1,000 more per year in your Roth.
The IRS calls those catch-up contributions, and they’re designed to help you close the gap between what you’ve managed to save and your actual retirement savings needs. But, if you’re aiming at a $1 million-plus nest egg, is it really possible to catch up by investing an extra $7,000 a year?
What It Really Takes to Catch Up
Technically, yes, you can catch up. Let’s say you’re 50 years old and want to retire at age 65. About 10 years ago, you worked with an investing professional to start setting aside 15% of your $55,000 annual income ($688 a month), splitting it it between your 401(k) and Roth IRA:
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You’ve saved $120,000 so far, and if you keep investing at the same rate, your retirement nest egg will be a little less than $800,000. That’s not bad, but it’s only enough to replace about 60% of your income when you retire.
If your goal is to replace 100% of your income, you’ll need a nest egg of $1.4 million. That means you’ll have to increase your monthly retirement savings amount to $2,156—almost $1,500 more than you’re saving now.
As far as the limits on your retirement accounts go, you can save what you need to in order to reach your goal. You were already maxing out your Roth contributions, but now that you’re 50, you can bump that up by $1,000 a year and put your entire Roth catch-up contribution to work. And if you increase your 401(k) contribution by the remaining $1,427, you’re well within the $24,000 401(k) annual contribution limit for people 50 and over.
Three Ways to Retire For Less
But the limits on your budget are a different story. Investing $2,100-plus per month means you would dedicate 47% of your income to retirement savings. Even with no debt and a paid-off home, that leaves you around $2,000 a month in take-home pay to manage the rest of your expenses.
While you’re willing to make some sacrifices to reach your retirement goal, you’re probably uncomfortable with the thought of living on about half your income for the next 15 years to do it.
So you and your investing pro explore your retirement planning options. Here a just a couple of ways you can save less per month, take advantage of at least part of your catch-up contributions, and still have a terrific retirement.
Cut back on retirement expenses
Instead of planning for a nest egg that replaces 100% of your current income, you could look at ways to cut back on the income you’ll need when you retire. One painless way to do that is to reduce your income needs by the amount you’re currently investing for retirement—15%.
Once you’re retired, you won’t be saving for retirement any more, so you could reduce your income replacement goal to 85%. Your new nest egg goal would be $1.2 million, and you’d need to invest $1,640 a month—that’s less than $1,000 a month more than you invest now. With a few more cost-cutting measures, you can reduce that amount even more.
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Figure in the sale of your home
If you recently paid off your home, you’ve already seen how that makes it easier to bump up your retirement savings amount. But it could also take some pressure off in terms of how much you’ll have to save yourself.
If you sell your home and use a portion of the proceeds to buy a new, smaller home with cash, then put the rest toward retirement, you can still reach your 100% income replacement goal by age 65 by investing $1,512 per month.
Push retirement back a few years
Time has a huge impact on retirement savings. We usually focus its power at the beginning of the retirement savings journey, but it is just as powerful at the end.
If you delay your retirement from age 65 to age 70, you’ll only need to increase your monthly savings amount by $335 to $1,023 to reach your 100% income replacement goal.
Keep in mind, though, that there’s no guarantee that you’ll be able to work and keep saving for retirement until age 70. Investing a little more now while you have a good income can help prevent a shortfall if you’re unable to keep working.
Start Catching Up Today With Help From a Pro
If retirement reality is starting to set in and you’ve realized you’re behind on your retirement savings, you’ll need a strategy you can stick to from now until your retirement date. An investing professional can help you outline the steps you need to take right now to get back on track.
Don’t put it off any longer. Put your catch-up contributions to work and change your retirement outlook today!