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How to Save for Retirement When Starting Late

If you look at the average retirement savings by age group, you might come to the conclusion that many older Americans are facing a pretty dire situation. According to the Economic Policy Institute, the average retirement savings of families in three different age groups add up to:

  • $6,200 for 44 to 49 year olds
  • $8,000 for 50 to 55 year olds
  • $17,000 for 56 to 61 year olds

This is the average amount that these age groups have saved for retirement, but these numbers don't necessarily reflect that 41% of Generation X —ranging from their late thirties to mid-fifties — and 42% of Baby Boomers — ranging from their late fifties to mid-seventies, actually haven’t saved anything for their later years.

These numbers may seem dramatic, but no matter how you look at it, it’s not a good sign. As a general rule of thumb, you shouldn't have less than six figures saved as you near retirement age; it can dramatically hinder your ability to enjoy your retirement or retire on time. (For more, see: How Much Should You Have Saved (by Age).)

Fortunately, there are changes you can make to help your retirement savings paint a brighter financial picture even if you're starting late. 

Start Saving Now

The best thing you can do for yourself is evaluate your own financial situation. Are you saving or investing for retirement? If not, there's no better time to begin than the present. Don’t waste time or energy regretting that you didn't start saving earlier. 

Contribute to a retirement plan if you have one through work. If your employer offers to match your contributions, put in at least enough money to get the match for a 401(k) plan or a SIMPLE IRA. Supplement your employer's plan with savings in a Roth IRA if you're eligible, and make the maximum contribution allowed for each year. (See: The Basics of Roth IRA Contribution Rules.)

Build up a cash cushion in a liquid savings account. This is an emergency fund that you have available in the event of an unexpected financial situation. Evaluate your expenses and see what you don’t need that you could cut to free up more money for savings.

These are great starting points and they can help you begin building your portfolio. The next step is reevaluating your investments to determine if they're aligned with your retirement goals. 

Invest Strategically

Investing in a strategic and aggressive way can help you catch up if you feel like you're behind on your retirement savings. Saving money in a savings account is good but you won’t earn a significant return on your money this way.

At best, you can earn about one percent through a bank savings account, which will not be much help given the rate of inflation is about three percent. This means your cash will likely lose purchasing power over the years, leaving it worth less than when you saved it.

Stockpiling cash is a beginning, but it won't help you get ahead of the average retirement savings by age. To do that, you need to get serious with your investments and look at how you can maximize your money.

There are countless investment options available to you and the best approach will depend on a few key factors:

  • Where you are today versus where you want to be in the future
  • How big the gap is between the two
  • How much risk you can handle (Remember, there’s a correlation between risk and reward: if you need to catch up on building your nest egg, you might want to take bigger risks to enjoy higher returns).

Keep in mind also that there's a difference between risk tolerance and risk capacity. The former is the amount of risk you're comfortable with; the latter is the amount of risk you can and need to take to reach your goals. 

Make Small Tweaks Now

If you're getting a late start in saving for retirement, you may think you have to sacrifice everything you enjoy today. But, such drastic action may not be necessary. 

Instead, take a look at your current expenses and ask yourself if there’s anything that you need to change. It doesn't mean you have to stop spending entirely; it just means looking for simple ways to reduce how much money goes out the door. Some ways to do that include:

  • Switching or canceling gym memberships
  • Canceling subscriptions you don’t use
  • Buying generic instead of brand name

Combined, these tiny things can make a significant and positive impact on your monthly budget, leaving you more money to save for retirement. The fewer expenses you have now, the easier it will be to reach a point where you can quit working. The less you spend, the less you need to save. (For more on this topic, see: 9 Ways to Trim the Fat From Your Spending.)

If saving more isn’t feasible for you right now, you may have to delay retirement work past the traditional retirement age. However, many people find that working a little bit past the date they expected to retire is a reasonable trade off if it means they get to maintain the lifestyle they want.

Delaying retirement can offer another advantage if it means delaying Social Security. Waiting longer to claim your benefits past your normal retirement age could result in a larger benefit amount. 

Counteract a Slow Start With Quick Action

The essence of financial planning is finding the best ways to maximize the resources you have to live the way you want today and in the future. It’s less about sacrifice and more about strategy and making the most of your time and investment opportunities available to you, even when getting started later. To avoid working longer than you have to, make a plan to take small steps towards saving and put it into action. (For more from this author, see: Managing Social Security Payments When the Beneficiary Can't.)