It is no longer a surprise that people are approaching their retirement age without much in their retirement savings account. Is there something you can do to salvage the situation? When you are on the other side of 40, time will seem like it’s flying but do not panic, this article will help you catch up.
First of all, it is important that you understand that you are not alone. A study by the National Institute on Retirement Security, over 45% of working-age households have nothing saved as security for their retirement. It doesn’t stop there, the report further indicates that the median retirement savings account balance for all working-age households is $3,000 and only $12,000 for the households almost approaching retirement.
It’s never too late though! That’s is one of the important lessons I learned early.
It’s Time To Play Catch-up
Assuming that you are already 40 in 2021, at this age, you are legally allowed to save $19,500 in a 401(k) retirement savings account. If you are 50 and over, you are legally allowed to save $26,000. These are the new maximums saved by the IRS for the years 2020 and 2021.
Assuming that you will get a 7% return on your retirement savings, that balance will grow to 1 million in 22 years and 8 months assuming that you can make the maximum contribution each year to your 401(k) account. By the time you are nearing your 63, you will have $1 million in your account. But you have to start now!
How Much Do You Need For Retirement?
This is another factor you have to consider. I hear people saying that they just want a simple life. That they do not want a million dollars in their accounts, but remember, once you quit working, a million dollars is nothing. Most experts agree that after retirement, you should not withdraw more than 3-4% of your retirement portfolio in a year. Let’s do some simple maths, 3% of 1 million is $30,000. That’s the much you have to live by in a year!
If you have no other sources of income and you want to live on an income of $30,000 in a year, you’ll need an investment of at least $1 million in your retirement savings account.
Reduce Your Risk Exposure
Diversifying your investments is not a bad thing at all, but some people make the mistake of taking additional risks in terms of investments just to make up for the lost time. Of course, the potential returns on the investments are usually higher; rather than a 7% return, there is a high chance of the investments growing 10-12%.
Higher returns on investments also mean that the potential for loss is also higher. Remember, your risk should always be aligned with your age. Younger people can comfortably invest in the riskier ventures as they have more time to recoup should they suffer a loss. Conversely, older people (40+) should take on less risk.
Consider An Additional IRA
Suppose that you do not have a 401(K) retirement savings plan available at your workplace, or assuming that you have already funded your account to the maximum, you can consider adding another retirement investment option such as an IRA. the maximum contribution to this account in 2021 is $6,000 plus an extra $1,000 if you are 50 years or older.
These accounts come in two varieties; there’s the traditional and the Roth. In a traditional IRA account the money grows tax-deductible upfront whereas, with the Roth IRA, you get a tax break at the other end in the form of tax-free withdrawals.
But remember, with a traditional IRA retirement savings account, if neither you nor your spouse has a retirement plan at work, you are allowed to deduct your entire contribution to a traditional IRA. if only one of you is covered by a retirement plan at work, your contributions will be partially deductible, but this will largely depend on your income and your filing status.
On the other hand, with a Roth IRA retirement savings plan, the contributions made are not tax-deductible. But, your income and tax filing status does come into play when determining whether you are eligible to contribute to a Roth account in the first place. The limits are well detailed in IRS Publication 590-A.
Make Sure That You Have Adequate Insurance
Most financial downfalls are caused by unexpected emergencies. Going into your 50s and 60s, you are more prone to health issues and you can reduce your risk exposure by buying adequate health insurance, disability insurance, and such. Make sure to also get car insurance. If you have any dependents, you should consider getting term life insurance for the time period that you expect your dependents to be relying on you financially.
It is not advisable getting a whole life insurance policy especially when you are in your 50s. Conclusion
It is never too late to start saving for your retirement. There are still plenty of solutions to get you up to speed with your retirement savings. Retirement planning especially when you are already late can be a challenge, but it can be done. Commit to adopting any one or more of the strategies mentioned in this article and in no time, you will have enough on your account to spend for your retirement.