If you’re not yet 60, there’s still time to save for retirement. But figuring out how much money you’ll actually need for your retirement is not simple.
You have to take specific steps to set and achieve your retirement savings goal, and you need to factor in your unique variables. For example, if you’re living in San Francisco, you’ll need a lot more retirement money than if you choose to retire in Corpus Christie, Texas. If you’re counting on a decent Social Security check each month, you’ll need less additional money than if those Social Security benefits are miniscule.
If you’re in your 40s or 50s, you can try the following savings and investment strategies to save nearly half a million dollars by the time you retire. Here’s how to build a big nest egg and what steps to take to figure out how large of a nest egg you’ll need.
Read More: 42 Ways to Save for Retirement
How to Save More Than $400,000 in 20 Years
Meet Stuart, an average 45-year-old guy who hasn’t been saving for retirement. He starts to worry that he won’t have enough to retire and commits to saving 15 percent of his $70,000 salary. He invests his money in a moderately aggressive portfolio of stock and bond funds offered by his employer.
Stuart’s investments are projected to average 7% annually. In spite of the ups and downs of the investment markets, at age 65, it’s likely that Stuart’s $10,500 annual retirement plan contribution will grow to a respectable $430,453, which would be enough to supplement his Social Security benefit.
In order to benefit from a plan like Stuart’s, you’ll first need to assess the current state of your finances and put a new retirement plan into action. Your plan needs to be based on your answers to the questions outlined below and on adjustments you make to your current financial priorities.
How to Catch Up on Retirement Savings: Your First Step
Before you calculate how much of your salary you need to save in order to retire, consider where you’re at right now. Your first step is to answer these questions:
- How much can you expect from Social Security when you retire? According to the Social Security Administration, in December 2013, the average worker received $1,294 per month.
- How much will your expenses total in retirement? Create a rough estimate of how much you think you’ll spend in retirement. Remember to increase your projections of medical costs and decrease estimates of what you’ll spend on commuting and expenses you currently only have because you’re still working.
- What amount do you get when you subtract your expected expenses in retirement from your expected Social Security income? That’s the amount of additional income you’ll need to supplement your Social Security check.
With these preliminary numbers in mind, you can proceed to the next step of identifying how to adjust your current finances and savings plan in order to save the amount of money you’ll need to retire. The following planning recommendations and lifestyle hacks can help trim your expenses without too much sacrifice.
How to Save for Retirement Now If You’re in Your 40s or 50s
It’s no secret that most Americans lack sufficient retirement savings. According to the Employee Benefit Research Institute, the average balance of a traditional individual retirement account balance for people ages 45 to 49 is $72,287. If you’ve fallen behind on your retirement savings plan and you’re not yet 60, there’s still time to catch up.
If you had a deficit between your anticipated Social Security income and the living expenses you estimated when you answered the questions above, then you need to jump-start your retirement nest egg. You can ramp up your savings efforts with a manageable plan by trying the following savings strategies.
Put Your Retirement Savings Ahead of Your Children
Now is the time to prioritize your financial needs for your retirement. If you don’t have enough for retirement, stop saving for your children’s college expenses. You must put your retirement first. If you don’t save for your own retirement, no one else will.
Contribute the Maximum to Your 401k or Roth IRA
You might expect to live 20 to 30 years in retirement. Now, during your peak earning years, you need to transfer some of your current income to support your future self in retirement. In 2015, the maximum you can contribute to a 401k is $18,000 with an additional $6,000 if you’re over age 50, according to the IRS. Start contributing more than you think you can afford to your 401k immediately and learn to live on the rest.
“It takes some focus to think about savings first,” said Jim Blankenship, certified financial planner and enrolled agent at Blankenship Financial Planning in New Berlin, Ill. “We’re hardwired to be consumers, and the extra funds often find their way into items that won’t necessarily help in the future when you need the money.”
This is likely a time you will earn the highest salary of your career, Blankenship said. “If you’re thinking about saving first, some of the extra cash flow can be put toward IRAs, maxing out your 401k, and developing or augmenting your emergency funds,” he added.
Keep Reading: How to Become a 401k Millionaire
How to Free Up Cash for Retirement Savings
If you’re afraid you can’t stretch your current budget to save more money for retirement, there are some small changes you can make that can free up tens of thousands of dollars each year. For most individuals and families, the largest annual expenses are housing and transportation. Slash those costs, and you’ve uncovered thousands more dollars for your future self.
Downsize Your Home
The average home size has grown from 983 square feet in 1950 to 2,500 square feet today. Think about whether you really need all of the space you’re currently paying for. You don’t have to jump on the “tiny house movement” bandwagon, but cutting down your housing footprint can reduce your housing costs substantially.
If you have a mortgage, make an extra payment each year and you’ll cut total interest costs and pay off the mortgage earlier. Weigh the refinancing options as well to find out whether you can lower your interest rate. Before refinancing, check the fees to make sure you’re actually saving money.
Dump the Gas-Guzzling Car
Buying a smaller car — and keep up maintenance so that it lasts as long as possible — also can help you save money. When you combine errands into one trip, keep your tires inflated properly, and shop for low-cost insurance and gas, you can slash driving costs.
Now is not the time to “keep up with the Jones.” The smarter you budget and plan now, the more comfortable you can make your retirement. If you sell your larger car or donate it for a tax deduction, you can put the money you get from it into your retirement savings.
Get a Lifetime Raise by Delaying Retirement
If you work a bit longer and delay retirement, your Social Security payment will increase each year past full retirement age until you reach age 70. If you can’t tolerate another year on the job, look for another type of work you can take on until you claim Social Security benefits.
Start Living Like You’re Retired
If you’re under 60, you still have time to prepare for a successful retirement. “The period of time just prior to retirement also gives you a chance to start ‘practicing’ retirement — increasing your savings rate such that your disposable cash is limited, much the same as it will be in your retirement years,” said Blankenship.
“By practicing for a few years,” he said, “you gain an understanding of just what luxuries and non-necessities you can live without — fine-tuning your spending plan so that as you go into retirement, you know much better how much money you really need.”