I vividly remember the first time I learned about the power of compound interest.
My 9th grade social studies teacher taught us a lesson on it, showing what would happen if one student started saving for retirement at age 23 and then stopped putting money away at 35, and another student waited until he was 35 to even start his savings.
Because of compound interest, the first student ended up with more money, and had had to put away a lot less.
Unfortunately, not everyone is lucky enough to have that lesson early.
According to the Employee Benefit Research Institute, 43% of workers had less than $10,000 put away for retirement in 2010. This will certainly not do.
Regardless if you’re 23 or 45, it’s important you’re taking control of your retirement accounts. Retirement can be one of the most relaxing and freeing times of your life, or it can be a nightmare of working and struggling to pay bills. I
f you feel like you’ve already fallen behind on your retirement savings, don’t worry, there are plenty of ways you can get caught up.
How to Catch Up on Your Retirement Contributions
If you’re one of the millions of Americans who have not put enough away for retirement, here are some things you can do to catch up:
1. First and foremost, you need to have an expert ally on your side. Find a reputable financial planner and lay out a plan together. It may seem as though only rich people need financial planners, but that is simply not true. Planning for retirement can be complicated, particularly if you are on a deadline, so get professional help!
2. Start cutting back. If you are still hoping to retire “on time,” you’ll have to re-prioritize your spending. With each paycheck, you’ll need to pay yourself first (that is a necessity!) before you spend money on non-essentials. This means getting rid of credit card debt and potentially even downsizing your home so that more money can go towards your retirement. You may have to rethink how you spend your money—no more lavish vacations or less help to your kids for college—but the better gift to yourself and your children is to be well prepared for retirement.
If you want to cut back (and you probably should), the best way to do this is to create a budget. If you don’t know where your money is being spent, you don’t know the areas where you’re overspending. The best way to do this is to create a budget through one of the finance managing apps, like Mint. Mint allows you to create an account and then sync the account with your bank accounts and credit cards. Mint then puts all of your transactions into the appropriate categories. You can see graphs which will show you the areas where you’re spending too much.
3. Keep working longer. This is an almost blasphemous idea—just look at the riots in Europe when the governments there suggest it—but continuing to work past the magical age of 65 is a way to stretch your retirement further. It reduces the number of years that you are retired, and it gives you more years to grow your nest egg and potentially earn more through Social Security. If you love your job, continuing to work can also give you a few more years to figure out how to transition into being a retired person—it might be an easier change financially and psychologically if you reduce your hours over a number of years.
4. Take on more work now. It’s always possible to take on a second job and funnel all of that money into your retirement funds. While no one in the midst of a career wants to be delivering pizzas on weekends, it is certainly possible to find work that will be rewarding and lucrative. Could you teach about your field at the local community college? Could you work a night or two a week at the craft store you frequent? Be open to diversifying your income, and it can really help your bottom line.
5. Absolutely do NOT increase the risk level of your retirement portfolio. This would be gambling with your future. Make sure that you are well invested with reasonable level of risk and return—or you might find yourself working until you’re 100!
6. Max out your 401k. Most companies have a 401k program they allow their employees to use. There are plenty of companies which have a matching program. These companies will match any dollar you put in your 401k account up to a certain amount. If you want to catch up on your retirement accounts, you should always max out the amount they match. If you don’t take advantage of the employer-match program, you’re leaving money on the table.
7. Use “Catch-up contributions.” I mean, it says it directly in the name. Depending on your age, you might be able to take advantage of catch-up contributions. For any worker over the age of 50, you can put more money into your 401k account compared to people who are under 50. If you’re getting closer to retirement, your limit jumps up to $24,500 every year. This is $6,000 more than those young whipper-snappers under 50.
Not only can you put more in your 401k, but you can also contribute more to your other retirement accounts, like your IRA or Roth IRA. For your IRA accounts, you can add an additional $1,000 to the limit. Those who are 50 or older can put $6,500. It might not seem like a lot, but every extra dollar can have a huge impact through the years.
8. Stay patient. Saving up for retirement is not a spring. It’s a long, long marathon. If you’ve realized you’re a little behind where you want to be, it’s going to take time to catch back up. This journey won’t happen overnight. It can be depressing to watch the number slowly creep up or to see how far you have to go, but don’t lose hope. You’ll get there eventually.
Catching up on lost retirement investing is not a fun prospect. But you owe it to yourself and your family to make sure money will not be a worry in your golden years.
Regardless of how old you are, it’s not too late to get started. If you want to take advantage of the magical compound interest, you need to start today.