Dear Liz: My wife and I aggressively paid down our mortgage
and now have it paid off, but we don’t have much saved for retirement. I make
about $90,000 a year and will receive a teacher’s pension that will replace
between 30% and 60% of that (depending on what option we choose) when I retire
in about 10 years. It probably won’t be enough to live on. We will receive no
Social Security benefits. We have no other debts, and we would like to make up
for lost time as best we can on retirement preparation. What is your best
advice for people like us who have diligently paid off their mortgage but have
not diligently put money away for retirement?
Answer: The older you get, the harder it is to make up for
lost time with retirement savings. You probably can’t do it if retirement is
just a few years away.
This is not to make you feel bad, but to serve as a warning
for others tempted to prioritize paying off a mortgage over saving for
retirement.
If you’re in your 50s, you’d typically need to save nearly
half your income to equal what you could have accumulated had you put aside
just 10% of your pay starting in your 20s. The miracle of compounding means
even small contributions have decades to grow into considerable sums. Without
the benefit of time, your contributions can’t grow as much so you have to put
aside more.
But you can certainly save aggressively and consider a few
alternatives for your later years.
Once you hit 50, you can benefit from the ability to make
“catch up” contributions. For example, if you have a workplace retirement plan
such as a 403(b), you can contribute as much as $26,000 — the $19,500 regular
limit plus a $6,500 additional contribution for those 50 and older.
You and your spouse also can contribute as much as $7,000
each to an IRA; whether those contributions are deductible depends on your
income and whether you’re covered by a workplace plan. If you’re covered, your
ability to deduct your contribution phases out with a modified adjusted gross
income of $105,000 to $125,000 for married couples filing jointly. If your
spouse isn’t covered by a workplace plan but you are, her ability to deduct her
contribution phases out with a modified adjusted gross income of $198,000 to
$208,000. (All figures are for 2021.)
If you can’t deduct the contribution, consider putting the
money into a Roth IRA instead because withdrawals from a Roth are tax free in
retirement. The ability to contribute to a Roth IRA phases out with modified
adjusted gross incomes between $198,000 and $208,000 for married couples filing
jointly.
If possible, a part-time job in retirement could be
extremely helpful in making ends meet. So could downsizing or tapping your home
equity with a reverse mortgage. A fee-only financial planner could help you
sort through your options, as well as help you figure out the best way to take
your pension when the time comes.
Click here for the
original article.