Catch-Up Strategies For Retirement Savings

After reviewing your situation, you may find that you need to play “catch up” when it comes to retirement savings. Strategies for you include:

• Start saving immediately if you’ve done little to prepare for retirement. Don’t be discouraged about what you should have saved years ago, but didn’t. Instead, focus on what you can do from today forward to create a more secure financial future.
• Retirement plan contribution limits are increasing through 2010 as a result of 2001 tax law changes. This includes additional catch-up contributions available to workers age 50 and older for both tax-deferred employer plans and IRAs.
• Repeat the phrase “if it is to be, it is up to me” and take it to heart. You still have many years to make up for lost time. Your investment time horizon is the rest of your life, not your retirement date. Remember, however, that income and benefits provided by government and employers are predicted to decrease in future years.
• The Employee Benefit Research Institute consistently finds that about half of American workers, both savers and non-savers, believe it is possible to save $20—or $20 more—weekly for retirement. While saving $20 a week does not seem like much, it results in more than $1,000 of savings annually, plus interest. After 20 and 30 years, respectively, at 5 percent interest, a worker would have $36,100 and $72,600. Ramp the return up to 10 percent by earning an average return on stock index funds (beware: this involves more risk) and the accumulations grow to $65,500 and $188,200, respectively. Small savings matter!
• Know your catch-up options. The good news for late savers is there are more than a dozen ways to make up for lost time. One basic strategy is to take action before retirement to increase savings. This can be accomplished by increasing contributions to tax-deferred retirement savings plans, accelerating debt repayment to free up money to save, moonlighting for additional income, and investing aggressively (more stock) to increase the potential for a higher return.
• Be sure to maximize tax breaks on investments (for example, tax-deferred savings plans and long-term capital gains), reduce investment expenses (such as broker commissions and expense ratios on mutual funds), fund multiple retirement savings plans, and preserve lump sum distributions from tax-deferred plans instead of spending them (for example, when changing jobs).
• The second basic catch-up strategy is to take action after retirement to decrease the amount of savings required to live on. This can be accomplished by trading down to a smaller home, moving to a less expensive location, delaying retirement, working after retirement, tapping home equity through a reverse mortgage or sale-leaseback, and making tax efficient withdrawals from savings.
• Specifics about all of the above retirement catch-up strategies can be found in the Guidebook to Help Late Savers Prepare for Retirement.