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How to Play 'Retirement Catch-Up' If You Had a Late Start

You've celebrated your 40th birthday (or better). Now that you're older and wiser, you decide to start learning about retirement planning. You assume you still have plenty of time. After all, retirement is more than a decade away.
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By Paula Pant

You've celebrated your 40th birthday (or better).

Now that you're older and wiser, you decide to start learning about retirement planning. You assume you still have plenty of time. After all, retirement is more than a decade away.

You start reading about retirement planning -- and your stomach churns. Every article and book says that you were supposed to start saving in your 20s. Oops. It's too late for that. You're firmly in the middle of life, and your retirement savings are meager.

How can you catch up, if you've had a late start? Here are a few tips.

#1: Understand How Much You Need

The first step is to understand just how far behind you are. How much money do you need in your portfolio in order to retire with the type of lifestyle you desire?

A fee-only financial advisor can walk you through a personalized calculation. But in the meantime, here's how to approximate the amount:

First, look at your current spending. Do you need $50,000 per year to sustain your lifestyle? $75,000? Or $100,000? This is the best indicator of your retirement spending. You'll shed some of your current expenses in your golden years, like commuting costs and your mortgage payment, but you'll add new expenses like out-of-pocket health costs, in-home assistance and travel.

Next, look at how much money you're on track to receive from Social Security and any pensions or other income sources that you might receive, if applicable. Subtract this from your expenses. The amount leftover is how much your portfolio needs to generate. For example, if you want to live on $70,000 annually and Social Security and pensions will pay $30,000 per year, your portfolio needs to generate $40,000 in annual income.

Finally, multiply that amount by 25 to get a rough estimate of portfolio size you're aiming to create. To generate $40,000 in annual income, you'll need a $1 million portfolio. This allows you to withdraw 4 percent annually, which is generally considered a safe withdrawal rate.

#2: Make Additional Contributions

Next, make additional contributions so that your portfolio can grow. Increase your savings rate, and use this to make extra retirement contributions.

There are two ways to boost your savings: earning more and spending less. Find ways to both earn extra money (such as through consulting or other side income) and also slash your current expenses.

#3: Use Tax-Advantaged Accounts

Concentrate your retirement contributions into tax-advantaged accounts, such as your 401(k) or 403(b), IRA, and HSA. This allows your money to grow tax-deferred or tax-exempt. Only contribute to taxable accounts once you've exhausted your eligibility to make tax-advantaged contributions.

#4: Work Extra Years

Plan to work for extra years and delay your target retirement date. This poses two benefits: your retirement portfolio has more time to grow, and you won't need to access it for as long.

Bear in mind, however, that not everyone chooses to retire. Many people are forced to retire due to health issues, family care responsibilities, or layoffs. Prioritize boosting your current savings rate, in case you're forced to retire earlier than you'd like.

#5: Repay Debt

Get rid of any current debts that you're carrying, particularly high-interest obligations like credit card debt. This will not only help you save hundreds or thousands on interest payments, it will also reduce your current expenses, giving you the ability to save more money in retirement accounts.

#6: Don't Accept Added Risk

Avoid the temptation to plunge into riskier investments in order to compensate for a late start.

Some people are tempted to invest entirely in stocks and equities, with little-to-no diversification into bonds, in order to capture a potentially higher upside. But this strategy carries significant risk, and the potential downside would be a double-whammy.

Maintain a sensible allocation between stocks, bonds and other asset classes. Keep a diversified portfolio, contribute regularly, and rebalance periodically. If you need help creating a portfolio, use an online asset allocation calculator or talk to a fee-only financial planner.

#7: Prioritize Retirement Over College Savings

This last tip may be a tough pill to swallow, but it's necessary: prioritize your retirement savings over your children's college savings.

There are a few reasons for this. First, your children have the rest of their financial futures ahead of them. You, however, don't have the luxury of time. Your retirement is an urgent priority.

Secondly, your children have more options. They can accept student loans; you cannot take out a loan to buy groceries and keep the lights on.

Finally, the best gift that you can give your children is your own secure financial future. Sure, your children may need to repay student loans, but they at least won't need to worry about supporting Mom and Dad.

Final Thoughts

You can create a secure retirement, despite your late start - but only if you make retirement a priority.

You'll need to make significant contributions to tax-advantaged retirement accounts, invest in a wise and well-diversified manner, and eliminate your debts. Most importantly, you'll need to start today.

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