Retirement savings catch-up: Steps to consider now

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Even if it feels like time is running short, you can still take steps to help stay on track for the retirement you want.
As you approach retirement, you may be concerned that your retirement nest egg is not as large as you'd planned. But no matter where you are in the retirement planning process or how much you've socked away, you may be able to do more to help prepare for a comfortable retirement. "It's never too late to get started," says Debra Greenberg, Director of Retirement and Personal Wealth Solutions at Bank of America. Here are five steps to consider that can help get you closer to the comfortable retirement you desire.
It's never too late to get started.
— Debra Greenberg,
Director, Retirement and Personal Wealth Solutions,
Bank of America

1. Put away a little more

Beginning in the calendar year in which you turn age 50, you're allowed to make annual "catch-up contributions" to a 401(k) plan, provided you are eligible under the terms of the plan, and IRA, in addition to the regular contribution limits for that year. If you have turned 50 and haven't yet taken advantage of this catch-up opportunity, you can start now.
Annual contribution limits
The maximum retirement contribution increases beginning in the calendar year in which you reach age 50. You may want to take advantage of this higher limit. View the most current 401(k) and IRA contribution limits.
Traditional IRA contributions permitted for those age 70½ and older, beginning in 2020
Under the SECURE Act, beginning with contributions for the 2020 tax year, individuals who are age 70½ or older are permitted to make contributions to a traditional IRA, which was not permitted in earlier tax years. The general eligibility requirements for traditional IRA contributions continue to apply, including that you must have earned income for the year in order to make contributions. If you are age 70½ or older and have earned income, you may want to consider making traditional IRA contributions in light of this new savings and investment opportunity.
Contributing a little extra to your retirement investments each month could yield rewards later. For example, putting an additional $25 a week toward retirement — what you might save by having breakfast at home instead of grabbing something on the way to work — could, after 10 years, yield an additional $16,470 in your retirement pot. After 20 years, that sum could potentially grow to more than $46,000, as the hypothetical illustration below shows.Footnote 1 If you can't find the extra cash now, consider pledging to increase the amount of your contribution if you receive a salary increase, bonus or tax refund.
If you invested an extra $25 a week
Imagine taking the money you spend on little splurges — a couple of take-out lunches or a few cups of coffee — and investing it in your retirement account. As shown below, a bit of sacrifice and reinvestment could potentially really add up over time.*
The image depicts four bar graphs showing how an investment could grow over time. From left to right, the first bar graph shows 10 years and has $16,470 at the top. The next bar graph shows 15 years and has $29,227 at the top. The third bar graph shows 20 years with $46,435 at the top, and the fourth bar graph shows 25 years with $69,646 at the top. Below the bar graphs are illustrations of practical ways to find an extra $25 to invest. Text reads: Finding an extra $25 a week to invest. From left to right, there's an icon of a drink, salad bowl and fork with the text two lunches out. There's a plus sign and an image of two bottles, and the text reads two bottles of water. Another plus sign is added, and beside it are two coffee cups. The text below reads two cups of coffee. There's an equal sign, and $25 along with a money icon.
Also, if you have a mortgage, consider refinancing to find additional dollars that you can invest. Rates are still low, so even relatively recent mortgages may benefit. Lower payments could reduce expenses which could provide more funds to invest in your retirement. But weigh your closing costs against how long you plan to stay in your home and other factors to determine if refinancing is a smart move for you.

2. Work a little longer

Postponing retirement can make a lot of sense. "Most of us are healthier at age 65 than the average retiree of our parents' generation," Greenberg says. Working a year or two longer can not only boost your savings considerably but also give your investments more time to potentially grow before you begin drawing on them for income. What's more, you won't have to stretch your retirement assets over as many years.
Staying in your current job may not be the only option when it comes to working longer. Consider whether you'd like to work closer to home, for example, or in a field you're more passionate about. But keep in mind that it could be risky to rely on working as your sole way of boosting retirement income. Indeed, according to the 2020 Retirement Confidence Survey by the Employee Benefit Research Institute, 71% of workers say they expect that continuing to work will provide them with income in retirement, but only 31% of current retirees are actually working for income.Footnote 2 That suggests that outside factors may get in the way.

3. Defer taking Social Security

You can opt to start taking reduced benefits as early as age 62. But for each year you delay, your monthly benefits grow, until age 70, when you earn the maximum. The additional income can add up quickly. In fact, for an individual who will reach age 62 in 2020 and who would have a full retirement age benefit of $1,000/month upon reaching full retirement age, delaying Social Security retirement benefits until age 70 instead of collecting at age 62 could potentially increase the lifetime monthly benefit by about 76%.Footnote 3 For a couple, each of whom will reach age 62 in 2020 and who have average life expectancies, that could mean an increase in lifetime benefits of more than $110,000.Footnote 4 The difference would vary based on your actual Social Security benefit.
Greenberg recommends that you consider tapping into other assets to cover expenses, or spend less, rather than drawing Social Security too early.

4. Rethink your housing situation

If you no longer need the space you once did, consider downsizing. Reduced living costs — including transportation as well as housing and maintenance expenses — could free up cash to put into savings, and you could invest any profits from the sale of your home. You might even think about moving to a neighboring town with lower property tax rates, or to a state with no personal income tax. Talk to your tax advisor to determine whether relocating might present an opportunity for you.
If you plan to stay in the same place through your retirement years, consider factors such as your future ability to climb stairs and whether you'll have reasonable access to stores and doctors' offices when you no longer want to drive.

5. Realign your portfolio

Your asset allocationFootnote 5 should typically become more conservative as you approach retirement. But consider continuing to hold some stocks or stock funds for potential asset growth to help offset inflation, since you could spend 20 to 30 years in retirement. "The main priority," Greenberg says, "is to have a disciplined approach to investing."
Next steps

Footnote 1 This hypothetical illustration assumes a 6% annual effective rate of return and was not adjusted for inflation. Had a different rate been applied, the results would have been different. Hypothetical results are for illustrative purposes only and are not meant to represent the past or future performance of any specific investment vehicle. Investment return and principal value will fluctuate, and when redeemed the investments may be worth more or less than their original cost. Taxes may be due upon withdrawal. If you take a withdrawal prior to age 59½, you may also be subject to a 10% additional tax, unless an exception applies.

Footnote 2 Retirement Confidence Survey Summary Report, April 23, 2020.

Footnote 3 This example is based on an individual who reaches age 62 in 2020 (correlating to a full retirement age of 66 and 8 months), and whose full retirement benefit is $1,000.

Footnote 4 Assumes a couple with full retirement age benefit of $1,000 each with a 2.17% annual Cost of Living Adjustment.

Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.