19 May 2022

8 Ways to Supercharge Your Retirement Savings When You Have to Start Later in Life

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Most of us understand the benefits of saving for retirement starting early. Compound interest, in which interest earns interest on itself and causes a snowball effect, can work wonders for retirement savings. But let's face it: For a lot of people, it is not realistic to prioritize retirement savings earlier in their careers.

During the early stage of our careers, we have many competing goals, like purchasing a home, saving for children, traveling, or paying off debt. With so many different goals competing for cash within a short timeframe, it can be challenging to prioritize retirement savings. If you haven't managed it yet, don't worry — you can still get starting saving later in life.

As a financial planner, I can tell you there are eight ways for you to supercharge your retirement savings when starting later in life.

1. Build your emergency fund 

First things first, you will need to build a sufficient emergency fund. This fund should be able to cover your expenses for three to twelve months depending on multiple risk factors.

It is best to keep this fund in a high-yield savings account or money market account where you will have easy access to the funds for emergencies. You want to keep this money as liquid as possible. That way you won't have to tap into your retirement savings or other investments to cover emergency expenses.

2. Max out your employer-sponsored retirement account 

In most cases, a 401(k), 403(b), or employer-sponsored retirement plan is the easiest way to start saving for retirement. The first action to take with these plans is to take advantage of any matching contributions that your employer offers. This match is a guaranteed return on your investment.

The contribution limit for 2022 is $20,500, or $27,000 if you are age 50 or older. Contributing the maximum allowed to your employer-sponsored retirement plan will enable you to supercharge your retirement savings, while saving on taxes.

Similarly, if you are self-employed, you can explore retirement options such as the solo 401(k), SEP IRA, and SIMPLE IRA.

3. Max out a Roth IRA 

Opening a Roth IRA is a great way to create flexibility during your retirement years. With the Roth IRA, you contribute to the account using post-tax dollars and the account grows tax-free.

Then, when you take money out of the Roth IRA during retirement, you do not have to pay taxes. After contributing enough to your employer-sponsored retirement plan to receive any match, consider maxing out contributions to a Roth IRA. The contribution limit for 2022 is $6,000, or $7,000 if you are age 50 or older.

Keep in mind that Roth IRAs have an income limitation. Make sure you confirm that you are eligible before contributing.

4. Max out an HSA 

If you have a high deductible health plan (HDHP), check to see if you are eligible for the Health Savings Account (HSA). HSAs are tax-advantaged, meaning that you can make contributions to the account with pre-tax dollars.

HSAs are triple tax-advantaged if you use the funds for qualified medical expenses. Not only can you make contributions with pre-tax dollars, but also the account grows tax-free and can be withdrawn tax-free for qualified medical expenses.

The contribution limit for individuals in 2022 is $3,650 ($7,300 for families) or $4,650 ($8,300 for families) if you are age 55 or older.

When planning for retirement, you must consider the cost of healthcare. We are living longer, and healthcare costs are becoming more expensive. In retirement, your HSA can be used as a dedicated pool of money to be able to pay for medical expenses.

5. Get rid of high-interest debt 

In most cases, paying off high-interest debt will provide the best return on your money. The average credit card interest rate in 2021 is around 16%. This is by far much greater than the historical 7% average annual stock market return rate.

So, with a $100 investment, paying off the credit card would save you $16, versus putting that same money in the stock market, where it would only earn you $7.

6. Watch out for lifestyle inflation 

As your income increases, it is very important to limit lifestyle inflation. Consider creating a zero-sum budget where every single dollar earned is assigned a job, whether that's going into savings, paying debt, paying bills, or treating yourself here and there.

Make sure you prioritize retirement savings within your budget, and automate them. Automation — sending the money into savings straight from your paycheck or your checking account — will help you avoid the temptation to spend that money on something else instead. Most people who automate their savings forget about the money, and don't even miss it.

7. Create multiple streams of income 

With less time for compound interest  to work to your advantage, it is important to save more aggressively towards retirement.

If you find yourself behind, consider your options for earning extra money through side hustles. You can use this extra money to max out your employer-sponsored retirement plan, Roth IRA, HSA, or consider investing in a taxable brokerage account.

8. Be a little aggressive with your investments 

To meet your retirement goal, it is likely that you will have to take on more risk to achieve the return needed.

If you are in your 30s or early 40s, you still have lots of time to save and invest towards retirement. You have room to be a little aggressive with your investments, if you can tolerate it. With a late start to saving, you will want to participate in the growth of the market. Consider dollar-cost averaging your money into the market to keep things simple.

Whether you are just finishing college, or approaching your 40th birthday, you will have time to save towards your dream retirement. You must make yourself a priority. Create a flexible budget that prioritizes saving for retirement before discretionary expenses. The earlier you start planning for your retirement, the sweeter it will be.

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