Sam started thinking about saving for retirement a few years ago. And now he’s finally getting around to doing it. The only problem is that Sam is nearly 50 years old.
Or is it a problem? Is there a point when it’s too late to start building a nest egg?
While it’s best to start saving for retirement as soon as possible to maximize your savings for your “golden years,” you can still make up for lost time, even if you’re middle-aged.
To put things into perspective, the federal Government Accountability Office (GAO) has reported that nearly half of U.S. households age 55 and older have no retirement savings. If you want to avoid being lumped into this category, it’s time to activate a plan to save for retirement.
But where do you start? And how much should you save on a weekly or monthly basis?
Online calculators are one way to help you get started with a retirement savings plan. Just plug in some basic information like your current age, when you expect to retire, your annual income, current retirement savings, etc. Then, you’ll get an idea of how much you need to set aside on a regular basis to reach your retirement saving goals.
One common way people save for retirement is through a 401k. A 401k is a pre-tax investment account that is sponsored by your employer. In addition to your own contributions, a 401k typically involves regular contributions from your employer as well. If your employer offers a 401k retirement plan, it’s a good idea to participate – otherwise, you’ll be leaving those employer contributions on the table.
But if a 401k isn’t available through your employer, it doesn’t mean you’re out of luck as far as saving for retirement is concerned. Another popular way to help save for retirement is through an IRA – also known as an Individual Retirement Account. There are two main types of IRAs – Traditional IRAs and Roth IRAs.
With a Traditional IRA, your earnings are not taxed until you withdraw the funds during retirement. The thought process is that you’ll likely be in a lower tax bracket in your retirement years than you are during the years you contribute to the IRA. Plus, the contributions you make to a Traditional IRA each year are generally tax deductible. The exact amount of your contributions that are tax deductible will depend on a number of things such as your income level, marital status, and whether you also participate in an employer-sponsored retirement plan. It’s also important to keep in mind that with a Traditional IRA, you will typically incur a tax penalty on any withdrawals you make before the age of 59 ½.
The main difference between a Traditional IRA and a Roth IRA is that a Roth IRA is funded with “after tax” dollars. What this means, is that you’ve already paid taxes on the money before it is placed in your IRA account. But the flipside is that any earnings you make off those contributions are tax-free. When you withdraw the money in retirement, you pay no taxes. Another thing worth mentioning about a Roth IRA is that there are no tax penalties for withdrawing your contributions prior to retirement – which makes sense because you already paid taxes on them before you contributed them. The caveat though is that you will be penalized for withdrawing any earnings from the account prior to the age of 59 ½. It’s also important to mention that there are income limits for Roth IRAs that could restrict how much money you can contribute to your plan annually.
Whether you decide to go with a 401k or an IRA, if you’re opening your retirement account later in life, you should try to save as much as you can, since you have less time to do so before retiring. It may mean forgoing a vacation every year or holding onto your car longer than planned, especially if it’s already paid off.
Ultimately, if you’re late to start saving for retirement, you may need to make some adjustments to your current lifestyle and/or your future plans, in order to make your retirement funds last as long as you’ll need them to.
Here are some ideas for making your retirement savings nest egg last, even if it’s smaller than you’d like:
- Move into a smaller living space. You could consider relocating to a townhouse or apartment, particularly if you’re still saddled with high mortgage payments and utility bills.
- Take on a part-time job and devote some of that extra pay to your retirement account.
- Consider delaying your retirement. If you can put off your retirement for a few years, not only will you be able to continue growing your savings, but you might be able to increase your Social Security retirement benefits as well.
The bottom line is that even if you’re in your 40s or 50s and haven’t set aside any money for your golden years, it’s still not too late to do so. And don’t forget that it’s always a good idea to consult with a tax professional or financial expert before making any major investment decisions.