Ask an Advisor: Is it Too Late to Start Saving?

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I’m 57 years old and wondering: Is it too late to save money for retirement? I expect to be working for another 10 years. Is that realistic? -- Maria, Trenton, NJ

Unfortunately, the American dream of retiring at age 65 seems to be a thing of the past. I think many of us will be lucky to be able to retire at age 70! There are plenty of reasons why most Americans do not have enough saved for retirement. Perhaps you suffered a financial blow (or several), or took time off from work to be a caregiver, or sacrificed to pay for your kids’ college. Whatever your reason, the good news is that it is never too late to save money. But if you are starting later in life and need a boost, here are some tips to help you succeed:

Be realistic. It may be depressing, but you probably need to revise your ideal picture of retirement and be realistic about what you need to do in order to have enough income to sustain you for decades to come. This could mean scaling back your lifestyle, downsizing your home (or renting, moving in with family or relocating to a less expensive area), working longer and maybe even working part-time through retirement.

Have a plan. There are several free retirement planning calculators online that can help you figure out how much you to need to save to support your retirement income needs. The AARP offers a good one, taking you through a step-by-step questionnaire that accounts for Social Security and other potential income sources (like proceeds from the sale of real estate and inheritances). It provides a detailed chart of your income sources over time and indicates any potential gap, and allows you to make a variety of adjustments to see how you can help improve your odds of not outliving your money. If DIY planning makes you nervous, it might be worth the cost of paying a fee-based Certified Financial Planner (CFP) to help you create a customized roadmap and implement suitable strategies. (You can read more about how to find the right financial planner here.)

Get rid of bad debt, for good. If you have nagging high-interest credit card debt, make it a high priority to pay it off. While debt consolidation loans are tempting, they are riddled with fees and the application process can be a real hassle. Save your time and money and use this handy spreadsheet instead to prioritize your debt and create an easy-to-follow payoff plan. You will save yourself potentially thousands of dollars that you can put into retirement accounts instead.

Get going. Don’t waste time on guilt and regret. Just focus on catching up. You should try saving at least 10 percent of your current income on a regular basis, though 20 percent would be ideal. (We know, easier said than done.) If possible, set up a monthly automatic transfer from your banking account to a retirement account so you force yourself to save and not spend. Once you have eliminated high-interest debt, commit to saving at least 80 percent of any extra income like bonuses, tax refunds, inheritances or lottery money (yeah right!).

Take advantage of tax breaks. If you have a retirement plan available through your employer, great. Set up automatic payroll deduction contributions, if you haven’t already. If you are already contributing, increase your deductions as much as possible. Keep in mind that if you are over 50, the IRS lets you put extra money in tax-deferred retirement accounts to “catch-up” on retirement savings. This year you can save as much as $23,000 in a 401(k) and $6,500 in an IRA. If you are self-employed you can open a SEP IRA and contribute as much as $51,000 this year or open an individual 401(k) and contribute as much as $56,500 if you are over 50. A CFP, as well as an experienced Certified Public Accountant (CPA), can be helpful in navigating your options and remember: simply contributing to a plan does not mean that you have purchased any investments (which is another step).

Stock up on stocks. While the market crash of 2008 was devastating and spooked many investors out of the stock market, the reality is that stock investing is still the best chance most of us have to grow our money and outpace inflation. Think about this: The S&P 500 Index has never had a negative return over the course of 15 years and its worst return in that time period was 5 percent. Over a 10-year time period, the Index’s worst return was -3 percent, but its best return was 20 percent. Some financial advisors recommend equating your age to the percentage of your investment portfolio that should be allocated to less risky investments, like bonds (so if you are 57, you would have 43 percent invested in stocks). Some advisors would argue that formula is still too risky, while other advisors would argue that you should have a greater percentage invested in stocks to achieve the growth you need, despite your age. Whatever allocation you ultimately choose, make sure that your portfolio is diversified and contains a variety of investments from different asset classes to spread out and reduce risk. And if you are uncomfortable making your own investment decisions, consult an advisor from your retirement plan’s administrator or a fee-based CFP.

Delay Social Security. One of the easiest ways to boost your retirement savings is to work longer. At age 62 your monthly Social Security payments would only be 70-75 percent of your full retirement benefit, but if you postpone claiming until age 70, your payments would be 132 percent of your full benefit. By waiting to collect, you will not only get more from the government when you need it, but you will also give yourself more time to save money in tax-deferred retirement accounts and build your nest egg. Additionally, your benefits are not affected if you continue to work after you begin collecting.

Saving for retirement can be daunting at any age, but it is particularly stressful when you are starting later in life. Taking stock of your current situation and having a realistic plan that includes investing in stocks will help you go a long way in a shorter time. Good luck!

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