So you’re hurtling toward middle age but haven’t started saving for retirement. The good news is, it’s not too late. Since many big events now happen later in adulthood – buying a first home, marrying, having children – it is not too surprising that saving for retirement is put off. Even for people on the cusp of 40, retirement still feels like something abstract and far away. But at the same time, reality has set in: It is time to do something. But what?
“Many people realize that they haven’t saved like they should have, and they run some calculations,” said Katie Brewer, a financial planner in Dallas. “But the calculations say they need to save a ridiculous amount, so they go into deer-in-the-headlight mode and don’t do anything.”
What if you don’t attempt to save that ridiculous amount, but started socking away money at a pace that you probably should have begun when “Seinfeld” episodes were still new?
Let’s assume you are 40 years old, earning $100,000, and you start squirreling away 10 percent annually. If you keep that up until you are 67, you could save nearly $582,000 on an inflation-adjusted basis or about $697,000 by age 70, according to calculations by Vanguard. (That assumes earnings grow by 1 percent annually, while savings return 4 percent each year, all after inflation.)
Not everyone can set aside that much. But there are still plenty of ways to save a respectable amount by the time you are ready to stop working full time – and not all of them involve slashing spending. Here are some ideas from financial experts who focus on the needs of Generation X, who, according to Pew Research, are now 34 to 49:
Forget the Joneses
Ask yourself: Do you really need the bigger, fancier car or home or fill-in-the-blank? Many in their 30s and 40s already have to pay for children, cars, health insurance, mortgages. Now may not be the time to play catch-up on savings, said Michael Kitces, a partner and director of planning research at Pinnacle Advisory Group.
“The real key for people going through this middle stage of life and career is to be cautious about the family upgrades,” said Kitces, who is also a co-founder of the XY Planning Network, a group of financial advisers who specialize in Gen X and Gen Y.
“The reality is that bulk saving in the later years may be the entirely normal path to retirement savings,” he said. The cost of children and college winds down, many hit their peak earning years, and sometimes single-income families become dual-income families again.
Do side hustles
That is what Alan Moore, also a co-founder of the XY Planning Network, calls jobs for extra income. Even a few hundred dollars each month can help you catch up, he added.
Savers can deposit that money in a standard individual retirement account or a Roth IRA – which allows people to save up to $5,500 annually or up to $6,500 if they are over 50 – as long as income does not exceed certain limits. Spousal IRAs can be set up for nonworking spouses, too. Savings vehicles such as Simplified Employee Pension Plans may allow you to save more.
Many in this age group may work several more years than their parents. Retiring at 67 – when people born after 1960 reach full retirement age under Social Security – may not be realistic, particularly for those having children later in life.
Continuing an education – by returning to school or gaining some helpful certifications – can help position them to earn more money (even on a part-time basis) as they become older. “This may be the best investment they can make,” Moore said.
Save more tomorrow
This approach, developed by two behavioral economists, is meant to help people without much willpower to save. The idea is to save half of future raises, bonuses or side-job money, Moore said. That is less painful because disposable income does not take a hit.
Ideally, this would be done within a 401(k)-type plan, but most workers would need to do it on their own.
Save more now
Other experts suggest just starting to save something, even a mere 2 or 3 percent of salary, in a tax-advantaged account like a 401(k), and slowly increasing the amount by 1 percent at regular intervals. (Some employers enroll workers automatically, though they will not necessarily increase contributions over time.) And naturally, those lucky enough to get matching contributions from employers should save enough to get them.
“I’ve encouraged clients to figure out what their target contribution should be, then figure out how to gradually increase to that amount instead of trying to do a big, sudden increase,” Brewer said. Or, “if someone usually gets a lot of money back when they file taxes, he or she could increase retirement contributions and adjust down the tax withholding.”
Instead of making drastic spending cuts and following strict budgets – which like bad diets, often fail and can set you further behind – other experts suggest tracking spending and eliminating things that you really don’t need or that don’t make you happy. Then, you might start by putting aside half of those savings, and increase it from there. Make all savings automatic where you can.
“Look for one big win at a time,” said Matt Becker, a financial planner who caters to new parents. “If you can cut a monthly bill in half” – say, by renegotiating or eliminating cable TV service, or even renegotiating car insurance – “and use the savings to set up an automatic contribution into a retirement account, that’s going to do much more than trying to save by agonizing over your daily purchases.”
Preserve home equity
If at all possible, try not to borrow against your home, though if you have a lot of high-interest card debt, consolidating through a home equity line of credit may be wise. Many families use home equity to pay for college, but this should not be done lightly.
If the mortgage is nearly paid off by the time you retire, you will have a big advantage: Besides allowing you to downsize and walk away with some cash, it will help if you decide to resort to a reverse mortgage, which generally lets people 62 and older tap a home’s equity with no repayment required until the borrower dies or the home is sold.
In catching up on retirement savings, perhaps the first place to start is to let go of the anxiety or shame over being behind – and then make some changes. “You do have time, and unless you have a big pile of debt,” Becker said, “you don’t need to do anything rash.”