Is it too late to save for retirement?

Most people have a vision of their lives in which they work until around age 60, retire, and then sail off into the sunset (or something equivalent). Investopedia reports that the average American aged 50-60 years old has around $160K saved in their 401k and most report contributing on average only 10% of their income to their retirement plans. This is not enough savings for a comfortable retirement in most parts of the United States. Working indefinitely into old age is probably not the desire of most people, so what do you do if you haven’t saved enough for retirement?

1. Build a Realistic Budget for Retirement

The first step to improving any situation is to grasp the reality of your current situation. Look at your current monthly expenses and build a realistic budget for retirement. Knowing what your cash out flow looks like can allow you to understand how much income you will need and what amount you are comfortable living on.

2. Pay Off Debt

Retirement is all about cash flow and debt is a cash flow killer. So much so that it may be better to hold off putting more money into your 401k plan in order to first pay off all debt. Start by listing out your current debts: mortgage, credit cards, personal loans, auto loans, etc. List the amount owed, minimum payment and interest rate. Pay off the smallest balance, then keep repeating until you are debt free. There is no one better at helping people get out of debt than Dave Ramsey. Here is a link to his debt snowball strategy. With no debt, the cash leaving your checking account in retirement will have dropped significantly, allowing you to live on less income.

3. Aggressively Save for Retirement

Once all your debt is paid off, you now have free cash flow to get aggressive with retirement savings. If possible, max out your 401k. For 2021, this amount is $26,000. If you can save more, look at saving into a Roth IRA. If your income is over the limit for this option, you can use the backdoor Roth strategy.

4. Work Until Age 70

Unfortunately, starting to save aggressively for retirement in your mid to late 50s requires you to set aside even more savings because there is less time for your money to compound and build on itself. To help with this, plan to work until age 70. Holding off on retirement for a few extra years will allow your investments to grow without withdrawals. It will also allow you to reach the max social security benefit age. For each year that you do not take social security between your full retirement age and age 70, there is an 8% annual increase in benefits. No matter your savings history, it is almost always better to wait until age 70 to take social security even if you retire at age 60.

5. Trust the Long-Term Investing Approach

Too often I see investors self-destruct the closer they get to retirement. The markets sell off and investors get scared, prompting them to move the portfolio to cash, only to realize losses and then invest again when they “feel better” about the market, which means the market is probably near it’s high again. This sell low, buy high tendency reduces the portfolio return, and if repeated enough could cost you a good portion of your portfolio. Building a portfolio of 60% – 70% stock and 40% – 30% bonds is an age appropriate portfolio for someone in their mid 50s. Use low cost index funds and resist making changes out of fear. Trust in the long-term capital markets and stick to your long-term approach. Remember that you are not investing until retirement; you are investing until you are dead. We create financial plans with our clients that last until at least age 95. This means that your money will be invested for decades, so don’t make short-term moves that kill your long-term performance.

There is almost always a path out of any financial situation. Grasping reality, developing a plan and executing that plan will lead you to that sailing off into the sunset moment, whatever that may be. In my 20 plus years of financial planning experience, I have had to deliver bad news to clients more than I would like, but leading them through these strategies have allowed many to find financial success in the end.

Casey Smith
President