Many Americans find themselves behind on retirement savings, and with life expectancies rising, this presents a growing challenge. To maintain your standard of living in retirement, experts suggest having about 8 to 11 times your annual salary saved by your mid-50s or early 60s. However, many are falling short, and some have saved nothing at all.
If you’re starting late or feel behind, don’t panic—it’s not too late to turn things around. Here are three effective strategies to help you catch up on your retirement savings and secure your future.
Maximize Contributions to Tax-Advantaged Accounts
One of the simplest and most impactful ways to catch up on retirement savings is by maximizing your contributions to tax-advantaged accounts like a 401(k), IRA, or Roth IRA. If you’re self-employed, you can also consider plans like SIMPLE IRAs, SEP IRAs, or solo 401(k)s. These accounts allow you to save for retirement while minimizing your taxable income.
If you’re 50 or older, you can take advantage of catch-up contributions, which allow you to contribute more to these accounts than younger savers. For example, by contributing an extra $1,000 annually to an IRA starting at age 50, you could have around $20,800 saved by age 65, assuming a 4% annual return after inflation. This extra contribution can significantly boost your retirement savings.
Tap Into Your Home Equity
If you own a home with significant equity, it might be worth exploring options to leverage it for retirement savings. Downsizing is one strategy that could provide you with a large influx of cash. If your kids have moved out and you no longer need all the space, selling your current home and purchasing a smaller, more affordable one can free up funds to boost your retirement savings. For instance, selling a home for $350,000 and buying one for $275,000 could add an extra $75,000 to your retirement nest egg. Plus, the first $250,000 in profit ($500,000 for married couples) from the sale of your primary residence is tax-free.
If downsizing isn’t an option, you might consider a reverse mortgage. This government-backed loan allows homeowners aged 62 or older to convert some of their home equity into tax-free cash. While it can be a good way to access funds in retirement, reverse mortgages come with certain risks and should be carefully considered as part of your overall financial strategy.
Be Strategic About Social Security
When it comes to Social Security, it’s tempting to begin collecting benefits as soon as you’re eligible. However, delaying your Social Security benefits can significantly increase your monthly payout. For each year you delay benefits from age 62 to 70, your payout increases by roughly 8%. If you wait until age 70, your benefits could be 76% higher than if you started claiming at 62, adjusted for inflation.
If it’s not financially possible for both you and your spouse to wait, consider having the higher earner delay their benefits while the other spouse collects early benefits. This can help alleviate immediate financial pressures while ensuring the larger survivor’s benefit later on, which is especially important if the surviving spouse will rely heavily on Social Security after the other’s passing.
Conclusion
With longer lifespans and rising healthcare costs, saving for retirement is more crucial than ever. By strategically using tax-advantaged accounts, leveraging home equity, and carefully planning your Social Security strategy, you can catch up on your retirement savings and feel more secure about your financial future.
