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6 Late-Stage Retirement Catch-Up Tactics

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Tough But Not Impossible

People approaching retirement age with little in savings may have a bumpy road ahead. Individuals in their 40s and 50s who have done little or no retirement planning are certainly at something of a disadvantage. However, with the proper planning and a willingness to save and invest, the odds are not insurmountable. Certain steps can build a nest egg as rapidly as possible, and to ensure at least some money will be there for support in retirement.

1. Fund Your 401(k) to the Hilt

The 404(k) is a powerful savings tool, and there’s evidence that workers nearing retirement should seriously consider funding their 401(k) as soon and as much as possible. An individual who is 40 years old and who contributes $17,500 annually to a 401(k) could accumulate more than $1.3 million in savings by age 65. This assumes an 8% return and no employer contributions (see Figure 1). If this individual increases savings by a catch-up amount of $5,500, at age 50, this would lead to an additional $271,000 in savings. Note that for 2017, these figures are $18,000 and $6,000 (catch0up), for a total of $24,000 and even more earnings potential.

 

2. Contribute to a Roth IRA

How much can one potentially sock away with a Roth? A 40-year-old who invests $5,500 each year (the 3017 limit) and obtains an annual rate of return of 8% has the potential to accumulate more than $434,000 by age 65. Even a person who waits until age 50 and starts saving $6,500 per year (using the same return assumptions) can save as much as $190,000 by age 65.

3. Consider Home Equity

Older individuals might consider borrowing against the equity in their homes in order to fund living expenses. However, a reverse mortgage may make more sense because lending institutions may shorten repayment periods and increase repayment amounts for older. Selling a primary residence outright and moving to a smaller and less costly home may also make sense for older individuals; in many cases they rarely need a big house, as children are usually off on their own. That said, individuals should consider current market conditions and whether it is the most advantageous time to sell. Naturally, homeowners should also consider any tax consequences.

4. Take Full Advantage of Allowable Deductions

It's important to note that standard deductions aren't for everyone. In fact, if you have a large amount of mortgage interest, deductible taxes, business-related expenses that weren't reimbursed by your company, and/or charitable donations, it probably makes sense to itemize your deductions. Sit down with a CPA and go over your personal situation to determine whether it makes sense to itemize. Then get in the habit of saving receipts and keeping good records. Remember, in the end it's not always what you make, but what you save that counts – particularly as you get closer to retirement.

5. Tap Into Cash Value Policies

Tapping an insurance policy for its cash should be considered a last resort. If the original need for the insurance is no longer there, it may make sense to cash out. However, before ever canceling any policy or accessing its cash value, you should first consult a tax advisor and an insurance professional to review your individual needs.

6. Get Disability Coverage

Don't forget to either obtain disability coverage or make certain that your job offers some sort of group disability benefit. The idea behind obtaining such coverage is simple: to protect yourself and at least a portion of your income and nest egg just in case the worst should happen. 

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