If you’re 40 or 50 and aren’t where you’d like to be in terms of saving for retirement, don’t despair. You can remedy this situation. And since people are living well into their 80s and 90s, it’s never too late to start. Here are a few things you can do.
Max Out Your 401(k)
This could be a game-changer. Stuart Ritter, a certified financial planner with T. Rowe Price, recommends that you save at least 15 percent of your income for retirement, including the amount your employer matches. If your company is contributing 3 percent, then you should save 12 percent. If you can’t go this high, then increase the amount by 2 percent each year. So, if you’re saving 3 percent this year, bump it up to 5 percent, then 7 percent, and so on. If you’re under 50, try to hit the $19,500 limit. After you turn 50, you can increase your annual savings to $6,500 on top of this $19,500 limit. Note: You have to be 59 ½ to withdraw money without any penalties. However, the early withdrawal penalty doesn’t apply if you’re 55 or older in the year you leave your employer. All this to say that the sooner you start doing this, the more you will save and the more you’ll have down the road.
Contribute to a Roth IRA
With this product, you can grow your money on a tax-deferred basis. For instance, if you’re 40 and invest $6,000 each year at an 8 percent return, then by the time you’re 65 you’ll have more than $473,726. Even if you wait until you’re 50 and save 6k a year, using the same rate of return, you’ll save as much as $175,946 by the time you’re 65. However, there are some income limitations. If you’re single and your modified adjusted gross income is more than $125,000, your contribution limit is reduced. If you’re single and make over $140k, you can’t contribute. Michelle Buonincontri, a certified financial planner, says that the beauty of Roth IRAs is that they allow for tax-free compounding. Further, when withdrawal rules are followed, the withdrawals, including the earnings, will be tax-free. And when you’re in the withdrawal phase, it can minimize taxable income, which can add up and help your money last longer during retirement.
Take Advantage of Your Deductions
Not everyone takes standard deductions. That’s why if you have a significant amount of mortgage interest, deductible taxes, charitable donations, and business-related expenses that your employer doesn’t reimburse you for, you’ll most likely want to itemize your deductions. Talk to your CPA and figure out whether this is a good plan for you. Then, start saving your receipts and keeping good records. As you get closer to retirement and if money is tight, remember: it’s not what you make, but what you save that makes the difference.
Don’t Forget About Home Equity
While home equity probably shouldn’t be used as your main source of income when you’re retired, it’s a viable solution. Retirees might consider borrowing against it to fund living expenses. In fact, you can use a home equity line (HELOC) to draw from when needed. Other options include selling, downsizing, and either living off the equity or investing it. But before you sell, you should consider tax consequences. Married homeowners who file a joint tax return can make up to $500k without owing taxes on capital gains. If you’re single, the cap is $250,000.
Get Disability Coverage
The reason for this is simple: to protect yourself and at least a portion of your income and retirement savings in a worst-case scenario. It is always a good idea to have a contingency plan.
Consider Your Cash Value Policies
This is the last resort, but again, a good option, especially if the original need for your insurance policy is no longer there. However, before you do anything or access its cash value, consult your tax advisor or insurance professional first.
No matter what your situation is, you can save for your future. All you have to do is begin now and take it one day at a time.