Nobody wants to be in the situation where time is running short, retirement looms large but your accumulated nest egg isn’t what you hope it to be.
Welcome to the ultimate guide for retirement catch up strategies.
What can you do to salvage your retirement when you’re on past mid 40’s?
Again, the adequacy of your accumulated retirement nest egg in terms of exact dollar and cents is subjective depending on your post retirement financial goals. That’s not the point of this guide. The point of this guide is to give you some practical ideas to consider if you ever have that gnawing feeling of inadequacy as we speak.
Also, I am not here to judge WHY you are feeling uncomfortable with your accumulated retirement nest egg. There are a lot of reasons – it could be because you were a procrastinator, a big spender, put several kids through college, or experienced more than your fair share of setbacks.
The good news is that you are very likely in your peak earning years. So that’s the consoling thing if my guess is right.
The first 3 strategies are what you must do pre retirement maximize savings growth. The final 2 strategies are how you decrease the savings required post retirement.
Constructing your retirement plan with the right combo of the six tactics above gives financial late-bloomers the best odds for retirement success.
The mindset for playing catch up retirement planning
Firstly, you need to discard the mental block of dwelling on past mistakes, or wallow in self-pity.
Blaming yourself, and getting frustrated or discouraged by your lack of results to date will only distract you further from your goal.
So consider today is the fresh start or Day 1 to your retirement planning. You got to focus on what you can begin doing today that will make the future different from the past.
Secondly, is to conduct a thorough reality check on your current situation. The starting point in this is determining the amount of retirement savings you’ll need in your post retirement stage.
The reason you must first estimate how much money you need for retirement is because all actions and plans will be designed around your retirement savings goal.
Without a specific, measurable savings goal, you’ll have nothing to work toward and no way of knowing if you’re on track, or behind.
Once you’ve completed this exercise, you’ll know:
- Your sources of income in retirement
- How much savings you have
- How much more you’ll need to be financially secure
- When you can afford to retire by
The difference between your current assets and future needs gives you an expected shortfall amount. This becomes your retirement savings goal to apply when working through the ideas in this article.
Retirement Catch Up Strategy 1: Boost your Savings Rate
This is the most obvious and no brainer step.
It’s as simple as it is unpopular because it requires decreasing spending and/or increasing income.
This is easy to say, but probably hard for you to do if you’re late to the retirement savings game in the first place.
But beggars can’t be choosers. This is the time when you have to decide what’s best to you and your family in long term. The bitter pills must be swallowed regardless of how bad they taste because they’re the only and most effective antidote to cure the problem.
- Vanquish All Consumer Debt: Credit card debt is notoriously expensive. Pay off your highest interest balances first and use the money freed up as each card gets paid off to accelerate the payoff of the remaining cards. Never settle for making minimum payments on credit cards because it’s financial suicide on the installment plan. It makes compound interest work against you instead of for you. The next prevention step is to NEVER spend more in a month than you can afford so you don’t acquire new debt. Don’t have consumer debt? Good! Check this off.
- Execute Regular Savings on Auto Pilot: Treat your main salary bank-in account like a transit point, not a dwell point. The least painful approach to lowering spending and increasing savings is with an automatic withdrawal plan from your paycheck so you never feel the money in the first place.
- Increase Savings Rate in Tandem with Income Rise: If you get a 5% income increment this year, increase your savings by similar amount. Most people increase expenses every time their income rises, but smart savers control spending by sending all raises and bonuses directly to savings where it can earn more income.
- Cut all Unnecessary Expenditure: Small things add up. Do an audit of your net income versus your recorded expenses. Then check if there are unaccounted for expenditure. For most people, this could be up to 20% of your net income. Track these, and cut whenever justified. It could be that unscheduled Starbucks visit with friends/colleague, bringing the kids to theme parks, eating out, etc. Examine your expenditure closely and get creative, because little differences in spending today, when compounded, can make a big difference in your retirement savings tomorrow.
- Explore the feasibility of new employer who offers higher paycheck: If you can ignore the temptations to spend more by keeping expenditure constant, this is an option to consider. It could be you are underpaid for the years and experience in your field too, so keep up to date with your ‘market value’. Once you know your ‘market value’, you can even renegotiate your compensation package with your current employer. The savings game isn’t how much you earn, but how much you keep after taxes and expenses. Another way to expand the gap between income and expenses is to consider new employment in another state or country where the cost of living is lower, allowing you to save more.
- Reduce the Premiums paid for Insurance Policies: The rule for insurance is only protect against losses you can’t afford to take. For a lot of people, policies taken in the early stage of their career can no longer serves in purpose, or just plain outdated. Do a comprehensive review of your old insurance policies, and you might discover the insurance you needed 10 or 20 years ago to protect your family may be an unnecessary expenditure now. You may be able to eliminate or reduce coverage and save the premiums for retirement instead.
- Moonlighting Income: Second careers and home-based businesses can supplement your retirement savings. The keys to making this strategy work are to pursue the moonlighting income in a field you’re passionate about and would enjoy even during retirement, and to commit all revenue produced toward boosting savings rather than lifestyle.
Remember, every little bit will make a difference. Keep a positive focus, choose new habitudes that build savings, and you can increase your chances to still achieve a comfortable retirement in record time.
Retirement Catch Up Strategy 2: Transform Non-Income Generating Assets Into Retirement Savings
After you’ve exhausted the straightforward ways to boost retirement savings and still find yourself coming up short, it’s time to explore alternative strategies.
And this has to do with the real estate properties you owned.
- Downsize Your Residence: When retirement is imminent, you can cash out your home equity by scaling down to a smaller, less expensive house. A kill 2 birds with 1 stone strategy because you increase investment income while simultaneously reducing or eliminating certain expenses such as your mortgage payments, utilities, maintenance, property taxes, insurance, and more.
- Relocate to a more Affordable Place: This is for people living in high cost neighborhood or state where property values have soared. Combined with the first tip, you then can consider relocating to a lower cost state or neighborhood. The cashed-out home equity can be enough to fund a significant portion of some people’s retirement needs. For example, $400,000 of equity invested at 6% produces $24,000 per year in income.
The 2 additional retirement booster tips below may or may not be available in the country you live in. Nonetheless, it is good to know.
- Reverse Mortgage: Another way to cash out the equity in your home that has the additional benefit of not requiring you to move is a reverse mortgage. In simple terms, it’s a tax free loan against your home equity that typically doesn’t get re-paid until after you move or pass away. These complicated transactions often come with high closing costs and high interest rates that will also reduce the value of your estate, so make sure you read the fine print and consider all competing alternatives first.
- Sale-Leaseback: Another tip for people who are house rich and cash poor in their retirement plan is the sale-leaseback arrangement. Usually this transaction involves selling your home to your children and renting it back. The desired outcome is for the homeowner tax deductions to go to the children who are hopefully in a higher tax bracket and for the parents to gain some spending cash while staying in their home. If you take this route, make sure to solicit solid legal advice that includes professional contracts and market rents so you don’t run afoul of the law.
Most people that go through the asset conversion process find that less is more.
Less stuff not only equals lower expense and greater retirement savings, but surprisingly, it also equals a lighter and more carefree lifestyle in retirement with fewer burdens and clutter to deal with.
Retirement Catch Up Strategy 3: Acquire Cash Flow Generating Assets
If you ever though of whether you can channel your liquid assets into riskier investments to generate potentially higher returns, I have a better option for you.
You need to move away from traditional paper assets like stocks, bonds, and mutual funds.
Most viable option is direct ownership assets include income producing real estate and owning your own business. These types of assets involve more risk and may have a lower certainty of outcome, but they include leverage principles that make aggressive retirement savings goals possible that would otherwise be mathematically impossible with traditional retirement planning.
The key point to understand is direct ownership assets are not bound by the mathematical growth limitations that govern how fast you can build equity in traditional assets.
Why is this so critical?
Because Late boomers in retirement planning generally can’t grow their assets to reach their goal using traditional strategies due to the return and time limitations.
The fact is, direct ownership assets like building your own business or real estate portfolio have no upside limit to equity growth because they have multiple sources of return and leverage.
Example, with real estate, I know people who have built a portfolio of properties acquired from secondary market over a period of just a few years and funded safe, secure retirements in a relatively short period of time through a combination of smart buying, rent increases, and adding value to their properties.
Nobody will tell you this retirement catch up strategy is easy as it require skills and involves risks, but a late saver with aggressive retirement goals may have no other viable alternative. It’s a choice that should be considered as part of any catch-up retirement plan.
Retirement Catch Up Strategy 4: Stretch your Retirement Goals
There are always 2 sides of a coin, and it’s true for retirement catch up strategies that you can employ.
The flip side of the same coin is to lower the amount you spend during retirement so you reduce the savings required.
The less you have to save, the easier the goal is to reach. Small differences in spending multiply to huge differences in savings burden.
This is a mathematical fact:
It is far easier to lower their budget by $1000 per month compared to coming up with another $300,000 in retirement savings.
Buying used, eliminating unnecessary expenses, and only spending what you can afford so you don’t incur consumer debt are always good principles to live by when you’re trying to get more value out of less money.
This isn’t that hard to do when you realize that happiness comes from experiences, not stuff. When you focus on experiences the spending naturally drops.
Retirement Catch Up Strategy 5: Redefine Your Retirement Plan For More Happiness and Less Savings
Still working after retirement may sound insensible, but working like crazy for 40 years and then spending 30 years doing little by watching the grass grow doesn’t make much sense, either.
For many people, having a full time career until the magical age of 62 and then stopping abruptly is an artificially contrived ideal.
Before getting excited about this retirement catch up strategy, carefully consider if you have the desire to work full or part time during retirement. Do you want to develop a second or third career that interests you?
Maybe you want to continue with what you already do, but work fewer hours? You can redefine what retirement means to fit your exact needs.
1. Delayed Retirement
It is no brainer, the longer you have an income generating position, the fewer years in retirement you must deplete from your retirement nest egg.
Not only does this lower the savings required, but it gives more years to continue growing your savings while having your employer cover medical insurance and other expenses. This can dramatically close the retirement savings gap.
2. Phased Retirement
Rather than stopping work, how about just slowing down? Some employers encourage workers to phase into retirement by reducing workload to three days a week so they can retain worker knowledge and skills.
If your company doesn’t offer this program, consider switching to a job that offers flex hours or large blocks of vacation time like teaching. This way, you can slow down without quitting entirely.
A tried and proven path to entrepreneurial transition in retirement is consulting for your previous profession.
Another popular phased retirement strategy is to convert an artistic passion or hobby interest into extra revenue. What avocations of yours could be converted into revenue streams? The choices are limited only by your creativity.
The bottom line is it’s never too late to begin saving for retirement.
You still have plenty of options and solutions available – but you must not procrastinate.
Retirement planning late in your working years may be harder, but you can increase the odds of success if you follow the retirement catch up strategies above.
Nobody should need or want to adopt all the strategies, so pick and choose only the ones that work best for you.