How to Invest for Retirement When You Don’t Have Much Saved
Saving enough for retirement can be a major financial challenge. Many people reach their 40s, 50s, or 60s without having put away substantial retirement funds. While the ideal is to start saving and investing for retirement as early as possible, it is never too late to develop a reasonable retirement investment strategy. Here are some tips for investing for retirement when you don’t have much saved:
Take Advantage of Tax-Advantaged Retirement Accounts
Contributing to tax-advantaged retirement accounts like 401(k)s and IRAs should be your first investment priority. The tax benefits will help your savings grow faster. Contribute at least enough to get any available matching employer contributions. Raise your contributions 1-2% annually to build retirement funds over time.
Investigate Catch-Up Contributions
Once you turn 50, take advantage of 401(k) and IRA catch-up contributions which allow you to contribute an extra $6,500 and $1,000 respectively beyond the normal limits. Use this provision to accelerate your retirement savings.
Consider shifting investments to more aggressive assets
The less time you have until retirement, the more aggressive your investment asset allocation may need to be. Consider shifting some fixed-income investments to higher return assets like stocks to better position your portfolio for growth. Have an appropriate high-risk tolerance that aligns with your time horizon.
Invest in equities cautiously
Having significant equity exposure can provide portfolio growth. However, focus on investing in high quality, dividend paying stocks. Have realistic return expectations. Diversify your stock holdings to mitigate risk. Avoid speculative risky stocks that can undermine your retirement strategy.
Look into delaying your Social Security benefits
For each year past your full retirement age that you delay taking Social Security payments, your benefit amount increases about 8% up to age 70. This can be an impactful strategy to maximize your eventual monthly Social Security income.
Set a goal for retirement savings
Determine a feasible retirement savings target based on your current savings, anticipated Social Security benefits, and post-retirement income needs. Establish a goal such as accumulating 12-15 times your ending salary. This gives you an amount to work towards.
Consider downsizing your home
Trading down to a smaller, less expensive home can free up significant equity that can bolster your retirement funds. With your children grown up and less space needed, a smaller home may better suit your needs.
Look for passive income sources
Generating passive income through avenues like real estate, investing in dividends stocks, or bond laddering can provide cash flow in retirement. While building substantial passive income takes time, explore options that align with your risk tolerance.
Save diligently and spend frugally
Consistently saving 10-15% of your income going forward and living below your means will make a big difference over 5-10 years. Curb spending on luxuries and discretionary purchases. Funnel the savings into retirement accounts.
Though late retirement planning is certainly challenging, implementing these steps can help strengthen your retirement outlook. The key is taking action now making retirement saving and investing an urgent priority.
When you have limited savings for retirement, consider these steps:
Start Now: Time is crucial. Even small contributions can grow significantly over the years.
Budgeting: Assess your spending and cut unnecessary expenses. Allocate the savings towards retirement.
Emergency Fund: Build a small emergency fund to avoid dipping into your retirement savings in unforeseen situations.
Employer Plans: Contribute to employer-sponsored retirement plans, like 401(k) if available, especially if there’s an employer match.
IRA: Open an Individual Retirement Account (IRA). Even small, consistent contributions can make a difference.
Automate Savings: Set up automatic transfers to your retirement accounts. Consistency is key.
Diversify Investments: Spread your investments across different assets to reduce risk.
Educate Yourself: Learn about investment options and consider seeking advice from financial professionals.
Delay Social Security: If possible, delay claiming Social Security benefits to maximize payouts.
Side Income: Explore opportunities for additional income, which can be directed towards retirement savings.
Remember, taking even small steps can lead to a more secure retirement over time.
The most important step to take in saving for your future is to start saving.
The government and many businesses offer incentives to save, such as IRA or 401(k) accounts, which allow account holders to accumulate savings tax-free for many years.
An employer’s contribution to a retirement account amounts to free money, and the benefit should be maximized.TABLE OF CONTENTS
RETIREMENT PLANNING RETIREMENT SAVINGS ACCOUNTS
Retirement Fund: How to Start Saving
The most important thing is simply to begin
By STEPHEN D. SIMPSON Updated December 07, 2022
Reviewed MARGUERITA CHENG
Fact checked SUZANNE KVILHAUG
Unless you are independently wealthy, setting aside money today to see that you have enough for the years down the road starting a retirement fund is not an option—it’s mandatory.
Unfortunately, inertia can be a powerful force, and going from not saving to saving can be daunting to most people. So much investment and financial advice are designed for people who have already begun saving and investing for the future. Below are some strategies for those looking to start the process.
KEY TAKEAWAYS
The most important step to take in saving for your future is to start saving.
The government and many businesses offer incentives to save, such as IRA or 401(k) accounts, which allow account holders to accumulate savings tax-free for many years.
An employer’s contribution to a retirement account amounts to free money, and the benefit should be maximized.
Starting a Retirement Fund
If you earn money, you pay Social Security taxes, but the funds used to pay Social Security benefits are expected to become depleted. According to the Social Security Administration (SSA), the 2022 annual report containing financial projections shows that the Social Security fund will be able to pay the full scheduled benefits until 2034. After that point, the trust fund will be depleted and only 77% of the scheduled benefits will be able to be paid with continuing tax income.
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Thus, it is unclear how well its benefits will cover the actual cost of living. Simply consider the debate today over chained CPI, a newer way of measuring the pace of rising prices called inflation, and what that could mean to the value of future benefits.
It is also important to note that the government (and many businesses) offers incentives to save. Putting aside money into an appropriate qualified retirement plan, such as an individual retirement account (IRA) or a 401(k), lowers a tax bill in the year that the money was saved and can accumulate tax-free for decades.
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Similarly, many companies will also contribute funds if an employee contributes to a retirement account. An employer’s contribution amounts to free money, and most financial advisors would encourage their clients to maximize this opportunity.
Challenges at the Start
Most people who are not already saving believe they do not have enough money to meet day-to-day expenses, let alone have any left over to save. However, paying yourself should be every bit as much of a priority as paying other people. Of course, it is unwise to default on loans or allow bills to go past due, but if you don’t take care of yourself, who will?
There will be months when you come up short and have little to save. You will also find that your investment choices may be limited. It is important not to become discouraged, but to save as much as you can, as often as you can.
Start Small
The personal-finance industry is set up to cater to those who have considerable wealth—virtually every bank and brokerage would rather deal with 10 millionaires than 10,000 people with $1,000 each. Nevertheless, your savings and retirement plans should be based on what meets your needs, not those of the financiers.