4 Ways to Get on Track for Retirement if You Started Late
You’re in your late 30s or 40s, and you haven’t saved much for retirement yet. Don’t panic. Here are four tips to help you save for retirement if you got a late start.
1. Max Out Retirement Funds
Make retirement savings your top priority. If your employer offers a 401(k), 403(b) or other type of retirement account, contribute as much money as possible. You can find the maximum contribution limits for a 401(k) or 403(b) plan on the Internal Revenue Service’s (IRS) website. These limits are updated annually, and the IRS also allows eligible taxpayers who are 50 or over to make an additional catch-up contribution, the amount of which is also updated yearly.
You may also qualify to contribute to an Individual Retirement Arrangement, or IRA. There are two types of IRA accounts: Traditional and Roth. Traditional IRA accounts allow you to potentially defer taxes on your contributions today, while Roth IRA accounts allow you to withdraw tax-exempt money in retirement if all requirements are met.
Most taxpayers are eligible to contribute to a traditional IRA, and your contribution might be (fully or partially) tax-deductible dependent upon your income and whether you’re covered by a workplace retirement plan. The IRS changes these income limits annually, so check their website for the most current limits or IRS Publication 590.
Alternatively, most taxpayers are eligible to contribute (fully or partially) to a Roth IRA if their income falls within certain limits. Consult the IRS website for a full breakdown of eligibility for both types of accounts.
Regardless of whether you choose a traditional or Roth IRA account, the IRS says, you can contribute up to the maximum annually limited by the lesser of earned compensation or the IRS limit.
2. Pay Off Debts
Another priority is to eliminate debts as quickly as possible. Review your budget and make a plan to pay off your debts. Start by tackling high-interest debt, such as credit cards. If you’ve had an issue with credit card debt in the past, you might consider switching to a debit card or all-cash lifestyle as a safeguard against getting into further credit card debt in the future.
Once you’ve repaid your credit card debt, tackle any other outstanding debts, such as student or car loans.
You may need to make major changes in your budget in order to boost your retirement contributions and repay debts. Consider cutting back on restaurant dining, clothing, vacations and other discretionary purchases, or find ways to boost your income on the side. In some cases, you may need to take more drastic measures, like replacing your car with an older model or even downsizing your home.
3. Pay Off Your Home
Ideally, try to retire after you’re mortgage-free, so that you won’t have to worry about paying that bill. Here’s one trick: start paying your mortgage every two weeks instead of monthly.
Let’s say your mortgage payment is $2,000 per month. Rather than pay the full amount each month, divide the amount in half — to $1,000 — and send this into your lender every two weeks. Because there are 52 weeks a year, you’ll send in 26 payments ($26,000), rather than 12 payments ($24,000). As a result, you’ll make an extra payment. This strategy allows you to pay off your home more quickly than you otherwise would, and may accelerate your progress to retiring mortgage-free.
Check with your lender to make sure you don’t have any early prepayment penalties before you start.
4. Rethink Retirement
Lastly, imagine how you’d like your retirement to look. Can you work part-time? Could you generate other streams of income, such as rental property income or royalties from creative work? Could you freelance or consult on the side? Or, could you move to an area with a lower cost of living? The more flexible you are, the better your chances of enjoying a more financially secure retirement.
Don’t worry about the fact that you’re starting late. If anything, take some comfort that you’re starting at as young of an age as you are today. You can still enjoy a secure retirement, as long as you’re focused and motivated to make this a priority.
The statements above are for educational purposes only and not intended as specific tax advice. Allstate cannot provide tax or legal advice. Consult a tax advisor regarding your particular circumstances.