In a perfect world, you’ve been saving a large portion of your salary every year in a retirement account. That money has been earning interest (and that interest has been earning interest), and you’ll be able to retire comfortably, maybe even early. Oh, retirement bliss…
The reality of retirement, however, is not always so rosy. In fact, 52 percent of American workers reported that they were behind on their retirement savings goals, according to a poll conducted by Bankrate.
If you’re like the people surveyed, the question on your mind might be, “How do I catch up on my retirement savings?” No matter how close you are to retirement or how little you have saved up, it’s never too late to consider new tactics to get your nest egg growing. Social Security and Medicare may not be enough to cover your retirement expenses, so the best ways to catch up on retirement savings will include smart retirement savings strategies and financial tactics.
Why do we fall behind in retirement planning?
When you’re thinking about how to catch up on retirement savings, it’s important to understand common retirement savings mistakes that can sideline your goals. This will allow you to develop effective retirement savings strategies to get back on track.
One of the most essential retirement savings tips is to avoid making early withdrawals on your retirement accounts. In that same Bankrate poll, nearly half, or 49 percent, of people with retirement accounts withdrew money before eligible retirement age.
While an early withdrawal may not seem like a big deal in the moment, especially if you have another need for those funds, it can actually have a significant long-term impact on your retirement savings. You could face early withdrawal penalties or fees, for example, which will reduce your current savings and your total savings in the future.
Be sure to consult with a tax advisor or your bank to determine the eligible age of withdrawal for your specific accounts.
It can be easy to divert the money you should be saving for retirement to other financial goals. Whether you become unemployed and need to pay the bills, or an unexpected expense arises and you have no emergency fund set aside for the purpose, life can get in the way. The good news is that you can learn how to catch up on retirement savings by following a few key strategies and tactics.
Consider these tips for saving for retirement to reach your retirement goal on your time frame:
Retirement savings strategies
1. Say goodbye to high-interest debt
One of the best ways to catch up on retirement savings is to pay off any high-interest debt as quickly as you can. Instead of spending on interest charges, you can divert those funds to your retirement savings. Thanks to compound interest, these new funds you are able to allocate to retirement will earn interest of their own, and that interest will start to earn interest. Pretty exciting, right?
Take stock of your existing debt, whether it’s from credit cards or loans, and update your budget with the goal of paying off your debt as soon as possible. You can consider starting with the debt that has the highest interest rate first, and gradually move on to debt with lower rates.
2. Reduce discretionary expenses
This retirement savings tip involves reducing those non-essential expenses (you may classify these items as “wants” instead of “needs”) and making lifestyle changes to free up cash for savings.
If you’re budget-less, creating one will really help you track your expenses and find areas where you can cut back, funneling those savings to help you catch up on your retirement savings. Consider implementing a zero-sum budget or the 50-20-30 rule to get started right away.
3. Save ‘extra’ cash
Putting any extra money you receive toward retirement is another retirement savings strategy to keep front and center. What can you consider ‘extra’ money? Think: tax refunds, inheritances, salary increases and bonuses, for example.
If you do receive a windfall, move it directly to a savings or retirement account. This will allow it to start earning interest right away, and it may help you avoid the temptation to dip into the funds for another purpose.
4. Increase your earning potential
When you’re figuring out how to catch up on retirement savings, one of the most proactive steps you can take is to increase your earnings before you take full retirement.
As you’re preparing for retirement, you may consider taking on a side hustle to supplement the earnings of your primary job. You might also explore a second job before you retire or a part-time job during your early retirement.
5. Create a savings goal—and go for it
Target a savings plan outside of your comfort zone. Having a specific goal in mind can motivate you to take the necessary steps to get there. It can also help you hold yourself accountable. The more specific the goal (how much you want to have in retirement savings, and by what age, for example), the more focused your efforts will be.
If you can buckle down, cut out as many discretionary expenses as possible and increase the amount of money you save each month, you’ll gain momentum toward your retirement goals faster than you think. This may require discipline, but it can be one of the best ways to catch up on retirement savings.
52% of American workers reported that they were behind on their retirement savings goals.
Financial tactics for catching up on your retirement savings
6. Consider your IRA options
As you’re putting these retirement savings tips into practice, consider your various IRA (Individual Retirement Account) options.
For example, the Discover IRA CD offers you the ability to earn a guaranteed return with flexible terms ranging from three months to 10 years. The Discover IRA Savings Account allows for flexible contributions and provides a place for you to transfer your maturing IRA CD without locking in a term.
One of the best ways to catch up on retirement savings could be using both accounts to complement one another. Explore Traditional and Roth options for both your IRA CD and IRA Savings Account to get the best tax treatment based on your expected income levels over time.
7. Max out your retirement accounts
Contributing the maximum amount allowed to your IRA and/or 401(k) every year is a crucial tip on saving for retirement. You may want to contact a financial advisor or tax professional for further information on your specific situation.
If you have a matching contribution from your employer, be sure you take advantage of this 401(k) benefit and contribute enough to get the full match. Think of this as free money that compounds tax-free until you withdraw it.
Your IRA may also give you tax savings now or when you start withdrawals, depending on whether you chose a Traditional IRA or Roth IRA.
8. Consider IRA catch-up contributions
Another retirement savings tip is that you and your spouse may each be able to contribute up to $1,000 more to your IRAs if you are both age 50 or older. You can make catch-up IRA contributions to your Traditional or Roth IRA in accordance with IRS income rules.
Note that IRA catch-up contributions (as well as regular contributions) are due by the due date of your tax return (not including extensions). Questions on your individual situation? Check with your financial advisor or a tax professional.
9. Learn the ins and outs of your retirement benefits
Check with the Social Security Administration to understand how your retirement start date impacts your benefits. The later you start drawing benefits prior to age 70, the larger your monthly benefit will be. Keep this information in mind as you update your budget and implement your retirement savings strategies.
No matter when you retire, be sure to sign up for Medicare three months before you reach age 65.
10. Explore retirement savings tax credits
Investigate your eligibility for the Saver’s Credit, formerly called the Retirement Savings Contributions Credit, available to some low-to-moderate income families to match a portion of your IRA or employer-sponsored retirement plan. If you qualify, this retirement savings tip could make a significant impact on your financial future.
Take the steps to get back on track
Figuring out how to catch up on retirement savings might be challenging, but it’s an important step for your future. While retirement is a lifetime goal for many people, some arrive unprepared. Once you begin to make changes and start saving, you may be surprised by how quickly your retirement funds add up.