I Haven’t Started Saving for Retirement Yet. Now What?

From maximizing your contributions to cutting your daily coffee run, you have options.

I’m 50 years old and haven’t start saving for retirement yet. What are some retirement catch-up strategies? Should I change my lifestyle dramatically now? What about how I approach my 401(k) or IRA? Are there other investment accounts I can take advantage of? I’m hoping it isn’t too late for me to retire comfortably.

Don’t worry just yet. There are certain retirement catch-up strategies that you can take advantage of — from extending your timeline to downsizing your home to even cutting your daily Starbucks habit.

And remember, you still have time.

“It’s never too early or too late to start saving,” says Katharine Perry, Associate Financial Consultant at Fort Pitt Capital Group in Pittsburgh, Pa. “Depending on your lifestyle, living comfortably in retirement may be easier — or more challenging — to achieve.”

401(k)s and IRAs

How you approach your 401(k) or IRA is a major piece of the retirement puzzle.

“Maximize any company retirement plan that is offered,” Perry explains. “That means contributing the most to that plan to get the company match — and then some. The contribution limit for 2017 is $18,000 per year into a 401(k) plan, so if this is possible, I’d recommend doing that. If not, contribute as much as you can to any retirement account that you have access to, and take advantage of the catch-up provisions. For 2017, the IRA contribution limits are $5,500, with an additional catch-up of $1,000 allowed if you’re over age 50.”

Another major thing to keep top of mind?

“Pay yourself first,” says Kathleen A. Grace, CFP®, CIMA®, and Managing Director of United Capital and author of Prince Not So Charming: Cinderella’s Guide to Financial Independence. This means maximizing your annual contributions. By starting as early as possible and taking advantage of the compounding effect (the time value of money), you have a greater chance of having enough to last through retirement.”

Taking advantage of employer matching is also key.

Contribute as much as possible to your company’s 401(k) or retirement plan — at least to the point of meeting the matching number, Grace suggests. When faced with the choice between an IRA and 401(k), the most important factors to consider are which option has an employer match, allows you to defer the most, has the lowest expenses, and offers the best investment selection, she explains.

Jane DeLashmutt O’Mara, CFP®, and portfolio manager with FBB Capital Partners in Bethesda, Md., notes that if you are not able to hit the maximum contribution, you should still aim to put away as much as possible.

“If you have not yet started making contributions to a retirement account, start to carve out as much as you can as soon as possible,” she notes. “Even if you can’t contribute up to the maximum amounts, begin with a smaller number and see if you can grow it throughout the year. Each time you earn a raise or bonus, I’d recommend earmarking a portion of that towards your retirement savings.”


Other Investment Options

There are other options outside of the traditional 401(k)s or IRAs. Grace suggests utilizing a Health Savings Account (HSA) to help sock away extra cash.

“Many high deductible health insurance plans offer a Health Savings Account (HSA). This is a brilliant way to sock away additional money (up to $3,400 for an individual annually), while also helping to pay for the deductible portion of your medical costs. [There are] three great benefits: the money goes into the account tax-free, you can invest it to grow within the account, and it is tax-free on withdrawals for qualified unreimbursed medical costs, including deductibles. You can even rollover any unused funds, and the big bonus is that, at age 65, you are allowed to withdraw for non-medical expenses without a penalty,” she notes.

Yet steer away from using 529 College Savings Plans, she explains.

“529s are a good way to save for higher education expenses (an accredited post-secondary school), but beware that any unused investment gain cannot be withdrawn without a penalty,” Grace says. “This would not be a good retirement savings vehicle.”

Should I Change My Lifestyle?

In a word, yes.

“Your retirement situation is not going to improve until you take control of it,” DeLashmutt O’Mara says. Assess your monthly spending habits to see where you can make cuts. If you have an idea of what income you’ll be living on in retirement, try living within that budget for a month or two to get a realistic sense of what it will be like.

Consider working longer, shrinking your expenses, or downsizing your home, she continues. Two other points to keep in mind when planning your retirement budget: “Don’t forget about medical expenses, and don’t assume that you will spend less in retirement.”

Perry suggests revisiting your needs versus your wants now in order to live better in retirement.

“Any frivolous spending can and should be cut down,” she explains. “This is where putting a monthly budget together comes in handy, so you can visualize where you’re spending excess amounts of money that you could be saving.”

Grace puts it simply.

“There are only a few levers we can adjust in order to meet retirement goals: save more, spend less, make more, take more risk in the portfolio, and/or delay retirement,” she notes. “In order to ‘catch up,’ it will require some sacrifice, including, in many cases, a combination of those levers.”

For most people, their single biggest expense is their mortgage or rent. She advises sticking to a budget of two weeks of your net income for all non-discretionary spending.

“This may mean downsizing: selling your home, taking on a roommate, and/or reducing rent expense,” she says.

On that note, keep an eye on discretionary spending, like your daily Starbucks run or eating out. Grace suggests keeping those costs to less than one week or your income.

And remember, when trying to catch up on retirement saving, take care of yourself first.

“I know it’s a challenge, and parents often want to help their children with school [and other costs],” Perry says. “But remember, you can borrow money for college and education. You cannot borrow money for retirement.”

What About Social Security?

Relying on Social Security isn’t a good idea, experts say.

“Slightly more than half of women 65 and older depend on Social Security for three-quarters of their income, and further the majority of Americans over age 65 living below the poverty line are women,” Grace says. “And given the cost of living, it isn’t a good idea to rely on living off Social Security.”

She points out that the poverty line for a one-person household in the U.S. is $12,060 in annual income, and the average Social Security recipient receives just $16,300 per year.

Perry echoes this sentiment.

“[T]ypically retirees cannot live on just Social Security alone,” she notes. “Plus, there are studies and news reports that have come out recently that show the benefit amounts decreasing over the next few years due to underfunding. This means you may not get 100 percent of the benefit that you qualify for anyway. Self-funding [your retirement] as much as you can is the way to go.”

So, is it simply too late to retire comfortably? Not so fast.

“It depends on your definition of ‘comfortable,’” Grace notes. “To some, retiring in comfort means having the financial ability to travel frequently in luxury. To others, it simply means meeting their living expenses without running out of money. It really means: ‘Am I going to be OK?’”