How to Catch Up on Retirement Savings
Like many Americans, Kathy McCoy and her husband got behind on their retirement savings. It happened because the McCoys, now 71 and 72 respectively, had been so focused on being able to afford a home in the pricy L.A. market that “we didn’t pay enough attention to the importance of saving for retirement,” said McCoy, a writer and psychotherapist.
When they were in their 40s, they realized that they weren’t on track for the retirement they had envisioned. “It felt scary,” she recalled. “When we began to understand compounded interest and all the advantages of starting to save for retirement early, we were alarmed and determined to make up for our late start.”
Angela DiCastri, director of Retirement Markets with Northwestern Mutual, said that people like the McCoys fall behind on their retirement savings for a number of reasons. Some lose their jobs or develop an illness or disability and can’t keep up their contributions. Others don’t save or don’t save enough because of other financial priorities such as paying down debt, buying a home or building college funds for their kids.
A 2015 report by the Government Accountability Office found that almost 29 percent of households with members aged 55 years or older hadn’t saved anything for their retirement and didn’t have a pension. Of those between 55 and 64 years old who did have retirement savings, the median savings amount was $104,000.
“People often don’t have a good appreciation for how much they should be saving,” DiCastri said.
But don’t panic if you find yourself behind on your retirement savings goals. Instead, it’s important that you take a realistic look at where you are and where you want to be, and then take steps toward bridging the gap.
1. Create or update your financial plan. “One of the first things you have to do is figure out how far behind you are,” DiCastri said.
To do so, DiCastri suggested you work with a financial professional to create or update your financial plan. This will help you compare how much you’ve saved with what kind of lifestyle you want to live in retirement, and it will help you understand how far you have to go to reach your retirement goals.
2. Start saving. To start making up the gap in savings, DiCastri suggested that you ask yourself, “’What am I willing to stop spending money on?’ That can be anything from making your own lunch to skipping a vacation.” When you start funneling that money into your retirement, it can make a huge difference.
McCoy agreed and suggested that people “find small ways to put more money aside, such as collecting your stray coins, foregoing expensive daily lattes and giving careful thought to major purchases. It can all add up.”
She also suggested that people try to find ways to increase their income or pension benefits before they retire. She ended up giving up a job that she loved to take on a job she liked less but offered a pension—something she is now grateful she did.
Another common strategy for making up the shortfall is to work longer or to plan to work part time in retirement. Just be careful not to rely too heavily on that plan.
“Many people think that they’ll work until they’re 70 if they’re behind, but often they’re not able to,” DiCastri said. “People retire on average four years earlier than they planned due to health issues, downsizing, relocation or the health of their spouse.”
3. Make a monthly commitment. Starting a monthly savings habit can also be very helpful in reaching your retirement goals. “Making a firm monthly commitment to put money into retirement savings is very helpful,” McCoy said. “It may be a sacrifice now, but it is something that will mean so much later on.”
For those who find it difficult to save for retirement, DiCastri suggests that often the best way to start is to set up an automatic monthly contribution to your retirement accounts. This can help you stay consistent and on track as you try to make up the shortfall. It also helps keep you from spending that money on other things. “If you’re never seeing the money, you don’t miss it,” said DiCastri.
4. Adjust your retirement goals. Ultimately, if you do find yourself behind on your retirement savings goals, it might be too late to make up the shortfall entirely, and you might have to re-evaluate your vision for retirement.
“People have to have a realistic expectation of what their retirement will look like,” cautioned DiCastri. “They may need to re-adjust what the reality of retirement looks like while still trying to save money to make as many of their dreams possible as they can.”
That’s certainly how the McCoys approached their retirement. They had planned to potentially move to Hawaii or stay in L.A. when they retired; but instead they moved to Florence, Arizona, where they could buy a house for half the price of their home in California.
Overcome Your Saving Challenges
For those who are behind, it’s important to start aggressively saving as soon as possible. The sooner you start, the easier it will be to make up the gap. It’s also key to work with a financial professional to help you overcome the challenges that you’re facing.
The good news is that you can have an enjoyable retirement even if it doesn’t turn out exactly as you dreamed. Despite the changes that the McCoys made, they love their retirement life.
“We found that we enjoyed reading, making music, taking local classes, working out and swimming—all things possible in our new community,” McCoy said, “We have been very much at peace and satisfied with our scaled-down retirement. What turned out to be important to us wasn’t costly.”