Help! I'm Behind on Retirement Savings. How Can I Catch Up?

Accelerating your retirement savings is a good idea. One of the biggest problems with retirement advice is that it’s usually prophylactic. That is, the most common advice when it comes to building a nest egg is “start early.” And to be fair, that’s true. By far the best way to build a strong retirement portfolio is to begin investing in it at age 25 and continue doing so over your working life. If you’re behind in your savings goals, however, it’s not too late to make significant strides and reach your goals. You can try and find ways to contribute more on your own or you can work with a financial advisor to make a plan.

Max Out Your Contributions

If at all possible, the first step is maxing out your retirement account contributions. If you are a W-2 employee with a retirement account, such as a 401(k), start by contributing as much as possible to this fund. If you are eligible to do so, regardless of your employment, also fully fund an IRA or a Roth IRA.

This alone can make all the difference. For example, at the time of writing the IRS allows a maximum 401(k) contribution of $22,500 per year. This excludes catch-up contributions for workers over the age of 50. Even if you start at age 40 with no savings at all, if you can make this maximum contribution every year you will have $2.2 million by age 65 at the stock market’s average 10% rate of return.

If you can even afford to contribute half of that, say $1,000 per month from your paycheck, you will have $1.18 million by the time you retire. Especially with Social Security factored in, this is plenty of money to enjoy a comfortable retirement on its own.

If you are over the age of 50, the IRS allows you to make additional contributions to a tax-advantaged retirement fund. At the time of writing, you could contribute an additional $7,500 to a 401(k) and an additional $1,000 to an IRA. This can add a lot of value to your portfolio if you can afford the additional contributions.

Emphasize Roth Contributions

For ease of use, your best option is to maximize any employer-sponsored plan you might have. However, if you are looking to catch up on your retirement savings, you want to emphasize growth over ease.

In that case, first, maximize your Roth contributions. For example, say that your employer offers a 401(k) and you also qualify for a tax-advantaged IRA account. In this case, you should set up a Roth IRA and emphasize contributions to that fund first. Once you have reached your Roth IRA’s annual limits, then make further contributions to your 401(k) or other pre-tax accounts.

The reason for this is taxes. A Roth account costs more upfront because you pay taxes on this money before you put it in your retirement account. But then you receive all of the account’s growth tax-free once you reach retirement age. This is a massive boost to the portfolio’s effective return and a very good way to grow your savings further.

Consider Changing Jobs

If you are self-employed, you may want to consider getting a W-2 job.

Quietly, one of the biggest problems with the retirement system is the degree to which it punishes and disadvantages entrepreneurship. If you work for someone else, you can contribute up to $22,500 per year in an employer-sponsored retirement account tax-free. If you work for yourself, you can contribute a maximum of $6,500 per year in an equivalent individual account. This has grown into a crippling problem for many workers in the age of freelancing and the gig economy.

For this reason, if you have struggled to save money for retirement, you may want to consider getting a job with retirement benefits. It will come with the significant personal and lifestyle handicap of swapping self-employment for the 9-5, but it will more than triple your tax-advantaged retirement savings.

Increase Investible Income

On the other hand, if you already have a solid job, you may need to consider finding a new income. For many households, this is the biggest issue. A crucial problem with retirement advice is that financial writers tend to focus on how investors can use the programs they have access to. As above, we recommend that people maximize their 401(k), take advantage of catch-up contributions and use Roth accounts whenever possible.

This is all sound advice, but it only helps if you have the money. Yet for most households, underfunded retirement accounts have little to do with financial discipline. They don’t have a retirement account because their employer doesn’t offer one, because they don’t have the money to invest or both. They put their income toward rent, childcare and food. Keeping the lights on today means putting off the needs of tomorrow.

Something needs to give, though, because eventually, you will need that retirement account. So it’s time to take three steps.

1. Focus On Your Goals

First, keep your goals in mind. It’s easy for this process to get overwhelming. “Save for retirement” is like “lose 50 pounds” or “build that house.” The scope is so overwhelming that it’s easy to just drop the issue altogether. So just focus on what’s immediately in front of you. You aren’t trying to find $1 million, just an extra $500 or $1,000 each month. That’s all and it’s a lot more manageable.

2. Budget

Next, do some hard budgeting. Are there areas you can cut? Can you manage any expenses so that your retirement fund comes first and dine out with whatever’s left? Do you have line items where you can use your money more efficiently? Is moving somewhere a little cheaper an option? This is where financial advisors can really come in handy since they can help you find ways to change your spending habits and improve your outcomes.

3. Get a Side Gig

Finally, consider getting a side job. Whether you pick up some shifts at a local store, begin driving for a rideshare or rent a room on Airbnb, this extra cash can become your retirement strategy. Dedicate it all to your retirement account so that you don’t need to worry about cutting things you need or love from your daily spending.

As with budgeting, this doesn’t need to be exhausting. You’re only looking to fill the gap, so don’t plan for another 40-hour-per-week job. You only need enough work hours to top up your existing contributions. For many people, this might be nothing more than a weekend afternoon here and there or even seasonal work depending on what’s available. Your 40s and 50s aren’t when you want to pick up a side gig, we know. But it’s better than having to do that when you’re 70.

Bottom Line

If you’re nearing retirement or even in your 40s, it’s important to begin paying extra attention to your retirement account. Even if there’s very little in there, it’s not too late. But you will need to work even harder to make sure your finances are ready for retirement.

Catch Up Planning Tips

• A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Catch-up contributions are tough. It’s terrific that the IRS allows them, but for most people, the problem isn’t tax caps, it’s income. So here are seven ways to help fund your catch-up contributions once you turn 50.

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