Financial experts generally recommend you start planning for retirement as early as possible. So if you’re in your 30s, 40s, or beyond and haven’t started planning, you might be a bit nervous. Is it too late for you to start saving? Not at all!
Planning for retirement is a “better late than never” situation. Even if you’re a bit late to the game, you can start planning and saving right now. You may have to make some changes to your lifestyle, and you will need to be more precise in your planning. However, this is all realistic for most people, especially with the guidance of a Financial Advisor.
The Magic of Compound Interest
First, it’s important to understand why experts recommend saving for retirement early. The key is compounding interest. As you earn interest on your investments, that interest is re-invested. When your initial interest earns interest, those funds are re-invested. The longer your money is invested and earning interest, the larger it will grow.
Here’s an example. Suppose you invested $10,000 at age 20. It earns 8% interest, compounded annually. In 40 years, when you are 60, that money will be worth about $217,000.
Now, say you wait until you’re 40 to invest that $10,000. It earns compounding interest for 20 years. That money will be worth about $46,000 when you’re 60.
Clearly, $217,000 is better than $46,000. Unfortunately, you can’t go back in time. If you’re no longer 20, the best thing for you to do is still to save! $46,000 is still better than $10,000. You can still take advantage of compounding interest for any time you have left until retirement.
Tips for Late Planners
Since you have less time to invest, you need to make sure the investment strategies you use are spot-on. Here are a few tips to keep in mind:
Review Your Budget
If you’re going to set aside money for retirement each month, that money has to come from somewhere. Look over your budget, and see where you can cut back. Can you cancel some subscriptions? Maybe you could get a better deal on car insurance, or perhaps you could dine out less often. Cutting your spending by even a few hundred dollars will make a big difference in your overall savings.
Start With Employer-Matched Plans
If your employer offers a 401(k) and matches contributions, that’s usually the best place to start saving. Your employer’s matched contributions are a part of your compensation package, so why not take advantage of them? After you’ve contributed up to the match, you can explore other retirement options like IRAs.
Keep in mind that retirement contributions limits increase for older adults. For instance, the 2022 Roth IRA contribution limit is $6,000 for most people under age 50, but $7,000 for those age 50 or older. Aiming to meet these contribution limits is a good goal for someone who starts saving later in life.
Push Back Retirement
If you’re late to the saving game, sometimes it’s helpful to push back your target retirement date. Perhaps you assumed you’d retire at 60. But waiting until you are 65 could give you an extra 5 years to save, plus an extra 5 years of compounding interest on your investments. Pushing back retirement isn’t always necessary, but it is something to consider, especially if you’re starting to save in your 50s.
Hire a Financial Advisor
As previously mentioned, there is less room for error when you start saving later in life. Working with a Financial Advisor truly is the best way to make sure you’re investing as much as you can as wisely as you can.
A Financial Planner can review your budget, income, and lifestyle to help you find the funds to save for retirement. They can explore whether bigger lifestyle changes are necessary, such as downsizing your home.
Goal setting is a huge step in retirement planning. A Wealth Manager can help you establish specific goals. When do you want to retire? How much do you need to save before you retire? Everyone has different answers to these questions; a Financial Planner will help you find your answers.
A good advisor will also help you break your retirement goals down into smaller, more manageable steps you can work on over days, months, and years. This can make retirement seem more approachable and can really help motivate you to keep saving.
It’s never too late to save for retirement. If you’d like help planning for your retirement, contact RLJ Wealth Management to schedule an appointment. With more than 20 years of experience, we’ve helped countless clients shape their futures, and we’re excited to help you do the same.