4 Retirement Planning Hacks for Late Starters

April 7, 2021

If you are someone who got a late start saving for retirement, you may fear that it is out of reach -- especially when you hear blanket numbers of how much you should have saved by now. 

But you can start saving for this milestone at any time. And if you are concerned that it's too late, these four hacks can help you catch up.

Woman sitting in front of a computer with hands covering her face and looking stressed.

Image source: Getty Images.

1. Earn a higher rate of return 

The more you can earn each year on your investments, the less you'll need your own contributions. And these greater investment returns can help you catch up for the time that you have lost. For example, if you start saving $10,000 a year at 40 and have 25 years to save, you can accumulate almost $650,000 if you earn 10% each year on average. Growing your assets to this amount would take closer to 30 years if you only earned 7.5%. 
The rate of return that you receive is largely determined by your asset allocation model and how much stock you own. And earning 10% each year on average would've taken owning only large-cap stocks over the last 93 years. Holding this much in equities means that you could gain more over the long term -- but during a bear market, you could also suffer more extreme losses.
You may be someone who doesn't mind the volatility, even as you near retirement age. But if the thought of your account value declining close to the time that you plan on using it makes you nervous, you should evaluate your risk tolerances and invest in a portfolio with a lower volatility.

2. Save more

If you are in a position where you have excess cash every month, you can consider investing it in your retirement account. In 2021, individuals who are under the age of 50 can add $19,500 to their 401k every year, and you can put an additional $6,500 in if you are over the age of 50. If these limits seem lofty and out of reach, there are other options that could also help you save more.

If you are eligible for a company match through your work, that could be a great way of increasing your contributions without coming up with the money yourself. With a company match, your employer will add a percentage of your income up to a maximum. So if you make $50,000 and your employer will match 6% of your contributions, they will add up to an extra $3,000 to your 401k.

That amount of money over 25 years could add up big. If you took $3,000 and earned 10% on it each year on average, in 25 years, you would have almost $325,000 in additional funds for your retirement. 

3. Work longer or part-time

Working longer or part-time could be an option for you, especially because life expectancies have increased. In 1935 when Social Security was created, the average life expectancy was 60.7 years, while in 2020, that number was 78.8.

Working longer can provide you with two main benefits. The longer you work, the fewer years you need to save for and the more time you can save money. Just maxing out your 401k and taking advantage of the catch-up provision could yield you $130,000 more in retirement savings over five years. 

Working longer can also mean that you're not working for its savings potential but so that you can supplement your lifestyle. If you determine that your income needs in retirement are $40,000 annually, Social Security will provide you with $20,000, and you can take out $10,000 each year from your retirement assets, you will only have a $10,000 gap. Depending on the type of work you do, this could be done with few enough hours and enough flexibility that you can still do many of the things you love. 

4. Reduce your expenses

If you can't save enough for the retirement that you always dreamed of, you can work toward changing your idea of what your retirement looks like. Maybe now it involves moving to a city with a lower cost of living or downsizing your home so that your monthly expenses are less. 

Cutting expenses can be hard, though. You can best accomplish this by creating a budget that starts with identifying what your expenses could look like in your ideal retirement. After you've done this, you can differentiate between which expenses are things that you need and which are things that you want. You don't have to give up everything that you want, but if you have a shortfall, you can either eliminate some of them or reduce your usage so that you don't risk outliving your assets. 

It is never too late to start saving for retirement. But the process starts with making a plan that assesses where you are now and where you hope you will be in the future. Taking this crucial first step can help you create a roadmap that will get you closer to the retirement that you've always envisioned.