How to Play Catch-Up on Retirement Savings
Life is busy and expensive, so it’s easy to get off track with your retirement savings contributions. Even if you had a regimented retirement savings plan in place, things happen, and you may find yourself falling behind. Even if you feel your savings plan is now out of reach, it’s never too late to prepare for retirement.
Whether you’re waiting for retirement age or you plan to stop working early, implementing aggressive saving strategies now will help you reach these goals. When you analyze your current financial behaviors and make the necessary changes, you can catch up on your retirement savings plan and get back on track to reach your retirement goals.
Table of Contents
1. Get a Retirement Plan
If you don’t already have a retirement plan in place, consider your savings options. You should already have goals that center around what retirement savings you should have by 40, how much you want to save by 50, and how much you should have saved when you retire.
There are several types of retirement savings accounts that help ensure you remain on track toward your goals. You may need to open a:
- 401(k): A 401(k) retirement savings plan is an account your employer offers. You choose the percentage of your paycheck you want to contribute and it’s taken out automatically. In some cases, your employer may also match a percentage of your contributions to this savings account.
- IRA: You can set up an individual retirement account (IRA) through a financial institution. When you contribute to the account, your money is invested and if all goes well, your IRA balance grows throughout the years. When you retire, you start taking withdrawals from your IRA to cover living expenses.
- Pension: If your employer offers a pension plan, you’re guaranteed a certain amount of monthly income when you retire, as long as you meet the program’s qualifications. Your employer contributes a specific amount to your pension while you work and it’s paid out to you when you retire. The more you earn and the longer you work, the higher your pension.
When deciding which retirement savings plan is right for you, consider your employer and what they have to offer. If you’re on your own, choose an IRA and hold yourself accountable to make contributions. If your employer offers a 401(k) or pension plan, contribute to the account and continue working until you’re confident you can retire comfortably.
2. Make Catch-Up Contributions
When you face unexpected expenses or a sudden loss of income, you may need to pause on making contributions to your retirement plan. When you’re back to being financially stable, it’s important to make saving for retirement a top priority.
Depending on the type of retirement savings account you contribute to and your age, you may be able to make catch-up contributions. This allows you to make higher contributions to your account for a period of time to “catch up” to where you need to continue following your retirement plan.
Before you begin pouring money into your retirement savings account, it’s important to understand how the government taxes this account. The Internal Revenue Service (IRS) sets catch-up contribution limits on retirement savings accounts, which are as follows:
- SIMPLE IRA or 401(k): A maximum $3,000 annual catch-up contribution.
- 403(b) Plan: If you’ve served for at least 15 years or are at least 50 years of age, you may be eligible to make extra contributions at a maximum of $57,000 annually or 100% of your compensation.
- IRA: If you have a Roth or traditional IRA, you can make a maximum $1,000 catch-up contribution.
Before you make a catch-up contribution, be sure you understand how this contribution will be taxed. Make sure the additional contribution won’t put you in debt or make it impossible to pay for other necessities.
3. Work Longer
If you have your hopes set on a specific retirement age, you may need to reconsider your retirement plan. If your plan for saving money was ambitious and has gotten off track, keep an open mind about working longer than you originally planned.
While it may not be what you had in mind, continuing to work for a few years after you originally planned to retire has its benefits. By staying in the workforce and continuing to earn a full-time income, you can keep contributing to your retirement saving account. If your account is a pension or 401(k) and includes contributions from your employer, continuing to work grows your savings more aggressively.
When you continue earning a full-time income, it’s easier to pay off debt, such as your mortgage or credit card balance. This puts you in a better financial situation when you do retire. By retiring at a later age, your Social Security benefits and/or pension payments will also be higher. The more time you spend working, the more time your investments and retirement savings accounts have to grow, increasing your retirement income.
4. Downsize Your Life
One effective and efficient way to save money is to downsize certain aspects of your life. You can begin to downsize your life and save more money for retirement by moving into a smaller home or living space. Finding a more affordable mode of transportation, such as taking public transportation instead of owning your own car, also allows you to build up your retirement savings.
If you plan to make these adjustments, it’s crucial to implement them as soon as possible. The sooner you downsize your life, the sooner you can begin contributing extra money to your retirement plan. After you retire, you’ll likely live on a fixed income, so continuing to live modestly will help you stay on budget.
5. Focus on Saving
If retirement is an important goal for you, your top priority should be saving money. By focusing on how you can save money now, you’ll set yourself up for an early and comfortable retirement.
When you focus on your retirement account and catch-up contributions, it’s easier to continue following your retirement plan. There are other ways you can increase your savings. If you reduce your spending, you’ll have more free income that you can save for retirement. When you receive your paycheck, first set aside what you want to contribute to your retirement plan before you begin to spend the money you earned.
6. Find Additional Sources of Income
One of the simplest ways to start saving money fast and expand the amount you can afford to save is to increase your income. Additional sources of income allow you to remain more comfortable financially. These may include:
- Taking on a second job: Consider a part-time job that you can work in addition to your regular full-time job, such as serving at a restaurant or working in retail.
- Finding a retirement career: You won’t need as much retirement savings if you continue to work in retirement. If you find a low-stress job you’re passionate about, it’s another source of retirement income you can earn while still enjoying retirement life.
- Starting a side hustle: Finding a way to make money on the side while you still have a full-time job or after you’ve retired helps increase your income. Try your hand at selling items online or petsitting to make extra money.
If you feel you may be behind on saving for retirement, address these concerns by increasing your income and catching up on your contributions. By getting yourself back on track, you can look forward to retiring at your ideal age.
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