Key Takeaways
- It’s never too late to plan and save for retirement.
- Investment time horizons end when people pass away.
- Catch-up strategies are available before and after retirement.
- Combining catch-up strategies provides multiple paths to financial security in later life.
- Compound interest works best when income taxes are eliminated, reduced, or deferred.
Financial experts urge people to plan and save for retirement as early as possible. In the real world, many people get a late start. Reasons include procrastination (“I’ll have time to save later”), sequential goal-setting (“I’ll start saving after I pay off student loans”) and life events (think marriage and children).
The good news is that it’s never too late to prepare for retirement. Even people in their 50s with little or nothing saved can make up for lost time. Like many decisions in life, catch-up retirement planning requires trade-offs. For example, spending less now to save more money or delaying retirement to earn additional retirement benefits and savings.
Remember, your investment time horizon is the rest of your life… not your retirement date. This means that, if you are age 55 today and live to age 90, you have 35 years to grow your money through the power of compound interest.
Catch-up retirement planning strategies fall into two basic categories:
- Actions taken before retirement to increase retirement savings
- Actions taken after retirement to decrease the amount of savings required
This article describes 20 specific retirement catch-up strategies.
Strategies to Increase Retirement Savings
Increase Retirement Savings Contributions
Contribute more to tax-deferred, tax-free (Roth), and/or taxable accounts. It is best to have all three account types for tax diversification. According to the Retirement Booster Calculator from Advantage Publications, saving 1% more of a $60,000 salary at age 50 will result in $26,143 of additional savings at age 65, assuming an 8% average annual return and 3% average annual pay increases.
Spend Less and Accelerate Debt Repayment
Use a tool like PowerPay to create a personalized debt repayment calendar using the avalanche or snowball methods. Reduced spending can free up money to accelerate debt repayment. Even small amounts added to current payments on debts can produce dramatic results. Once debts are repaid, reallocate previous payment amounts to retirement savings.
Side Hustle Income
Consider a second job, consulting, or self-employment through a home-based business, if you have skills that can transfer to another work experience. So-called “side hustles” increase household income and provide additional funds for retirement savings and access to tax-deferred SEP accounts. A major disadvantage, however, is time required to work additional hours.
Invest More Aggressively
Note that, the more stock investors own, the higher their average annual return will likely be over time and the greater their portfolio’s volatility (ups and downs of share prices). U.S. stocks have earned about 10%, on average, since 1926. Of course, not everyone is comfortable with stock market risk. If you’re a conservative investor, this catch-up strategy is probably not for you.
Maximize Tax Breaks
Maximize income earned on retirement savings. Compound interest works best when income taxes are eliminated (e.g., tax-free Roth accounts and municipal bonds), reduced (e.g., long-term capital gains taxes on securities held for more than a year), or deferred (e.g., traditional 401(k)s and IRAs). Tax-deferred accounts provide upfront tax savings that can be saved.
Reduce Investment Expenses
Think low expense ratios (expenses as a percentage of assets). Costs matter, especially over time. An investor in a low-cost index mutual fund with a 0.04% (four hundredths of one percent) expense ratio will have much more in savings than someone in an investment charging 1.5%. It’s not what you earn on investments but what you keep!
Diversify and Dollar-Cost Average
Reduce investment risk through diversification. Late savers don’t have much time to recoup losses when they are close to retirement. Dollar-cost averaging means investing equal sums of money (e.g., $100) at regular time intervals (e.g., monthly), which reduces average share costs over time.
In the table below, the average cost per share is $7.06 ($600 divided by 85 shares).
Illustration of Dollar Cost Averaging
| Time Period | Regular Investment | Share Price | Shares Acquired |
| Month 1 | $ 100.00 | $10.00 | 10.00 |
| Month 2 | $ 100.00 | $ 8.00 | 12.50 |
| Month 3 | $ 100.00 | $ 5.00 | 20.00 |
| Month 4 | $ 100.00 | $ 5.00 | 20.00 |
| Month 5 | $ 100.00 | $ 8.00 | 12.50 |
| Month 6 | $ 100.00 | $10.00 | 10.00 |
| Total | $600.00 | 85.00 |
Have Multiple Savings Plans
Save money in different places to have multiple streams of income in retirement. In addition to tax-deferred employer plans, workers can contribute the maximum annual amount allowed, plus catch-up provisions (for those age 50 or older) to a Traditional or Roth IRA. Other places to save are SEPs with self-employment income and taxable (brokerage) accounts.
Preserve Lump Sum Distributions
Avoid the temptation to spend all or part of lump sum distributions from employer plans when you change jobs. Instead, roll them over into an IRA or other tax-deferred plan. Studies show that smaller distributions are more likely to be spent, even with taxes and early withdrawal penalties. Compound interest cannot be earned on money removed from savings.
Sell Personal Possessions
Consider selling unneeded possessions to both raise cash for retirement savings and reduce clutter, especially if a post-retirement move to a smaller dwelling is planned. Sales can be done via flea markets, garage sales, newspaper classifieds, and online platforms such as Facebook Marketplace, eBay, and Craigslist.
Reposition Income
Reallocate payments for expenses that end to retirement savings. Examples include student loans, paid off credit card balances, child care expenses, car loan payments, mortgages or home equity loans, private mortgage insurance (PMI), and personal loans. Ditto for increased income sources such as raises and promotions, tax refunds, overtime pay, inheritances, and credit card cashback rewards.
Strategies to Reduce Retirement Expenses
Trade Down to a Smaller Home
Consider trading down from, say, a $400,000 four-bedroom home to a $150,000 two-bedroom condo. Proceeds from the sale (minus sales and moving expenses) are available to invest for income. In addition, there are generally lower maintenance costs, property taxes, and utilities on a smaller property.
Multi-Generational Housing
Explore this option to stretch retirement income and assets when family ties are strong. In this scenario, three generations (older adult, middle-aged “child”, and grandchildren) live under one roof, each contributing money to maintain the household and services provided to each other (e.g., rides for errands and child care).
Geographic Arbitrage
Explore moving to a less expensive location in the U.S. or abroad. This strategy works well if you currently live in a high cost area. You may be able to retain similar square footage to what you presently have, but at a reduced cost. A major trade-off, however, is less proximity to family, friends, and community.
Delay Retirement
Consider the benefits of working a few years longer than planned: additional income to invest in tax-deferred plans, postponed asset withdrawals to stretch out retirement savings, and increased formula-based pension benefits and Social Security payments.
Work During Retirement
Decide if full- or part-time work or starting a home-based business is right for you. In addition to providing additional income, a working retirement can provide a sense of fulfillment, social contact, and daily time structure. Also consider this: $40,000 of earnings is equivalent to taking a 4% withdrawal from a $1 million portfolio.
Tap Home Equity
Explore reverse mortgages, available to homeowners age 62+. Borrowers receive a lump sum, monthly payments, or a line of credit based on age of the homeowner, amount of home equity, and current interest rates. With sale-leaseback arrangements, homeowners sell their home, typically to a close family member, and lease it back. Proceeds from the home sale provide retirement savings.
Tax-Efficient Asset Withdrawals
Make withdrawals from retirement savings in a tax-efficient manner so this money lasts longer. Generally, this means tapping taxable (brokerage) and tax-free investments first, then tax-deferred accounts made with after-tax dollar contributions, then pre-tax accounts when required minimum distributions are due, and finally Roth accounts.
Buffer Accounts
Avoid sequence of returns risk, the risk that poor investment returns early in retirement, combined with withdrawals for living expenses, will substantially reduce a portfolio’s value, increasing the risk of running out of money. Buffer accounts hold cash assets outside retirement accounts to pay living expenses during market downturns and shield retirees from equity asset withdrawals.
Discounts and Comparisons
Stretch retirement savings by shopping department store sales, using coupons, joining retailer loyalty programs to earn rewards, shopping at thrift and consignment stores, and shopping for deals online,
For “big ticket” purchases, use the Rule of Three to compare features of three competing product or service vendors head-to-head with respect to criteria that matter to you.
Final Thoughts
While each catch-up strategy was explained individually, two or more of them can be combined for greater impact. For example, 1. investing more in a 401(k) and moving to a less expensive location, and 2. starting a side hustle for additional income and delaying retirement. Bottom Line: It is never too late to take action to secure your future.
