Haven't saved enough for retirement? You're not alone (see BusinessWeek.com, 7/24/06, "Retirement Guide"). More than two-thirds of U.S. workers say they and their spouses have saved less than $50,000 toward retirement, according to an annual survey by the Employee Benefit Research Institute.
Sure, you'll always find reasons why now might not be the best time to worry about your golden years. Bills, family responsibilities, and busy schedules can make it easy to rationalize falling behind in building your retirement nest egg. But the sooner you start saving more, the better off you're likely to be, thanks to the power of compounding.
No matter how far you are from retirement, it's probably a good time to take a quick reality-check. A financial adviser or one of the many investment Web sites can help you determine where you stand on your road to retirement. "Find out, once and for all, what you have now, what you'll need then, and what steps must be taken now to make it happen then," says Philip Watson, a financial planner in Franklin, Tenn.
This Five for the Money looks at smart strategies for catching up on your retirement savings. One hint you will not find here: striking it rich thanks to your unparalleled stock-picking genius. It may not sound sexy, but careful planning and a broadly diversified investment portfolio can help you make up for lost time.
1. Boost your savings to the max
For once, the taxman is willing to give you a big break. You'd be foolish not to take advantage of that, right? Retirement savings accounts such as 401(k)s and IRAs allow workers to sock their hard-earned money away on a tax-deferred basis. In a 401(k), employers will typically match your contribution, too.
Make sure to contribute as much as you can to these accounts—at least up to the company match in your 401(k). "Take all the free money you can get," says Marjorie Bennett, principal at Emeryville (Calif.)-based Aegis Capital Management. For 2007, the maximum most investors can contribute to a 401(k) is $15,500. The limit for contribution to an IRA this year is $4,000. Depending on annual income, IRA contributions may be tax deductible. You can still contribute through Apr. 15 to take deductions for the 2006 tax year.
Better still, investors 50 and over are allowed to make "catch-up" contributions to their tax-advantaged retirement accounts. These investors can add another $5,000 to their 401(k) in 2007, and an extra $1,000 to their IRA. Many investors may also want to consider a Roth 401(k) or IRA instead. Contributions to Roth accounts aren't tax-free, but withdrawals are.
2. Get your assets into alignment
A well-diversified portfolio can increase the chances your assets will participate in market booms and help insulate your savings against the inevitable busts. Check your asset allocation and make sure it's right for you. A smart portfolio might have exposure to a variety of asset classes, including domestic stocks, international stocks, bonds, and more (see BusinessWeek.com, 4/6/06, "Winning the Game of Risk").
For instance, many baby boomers' portfolios are too heavily allocated to fixed-income investments, some financial planners say. "Sure, equities will result in a rougher ride during some periods, but the long-term benefit is better returns that will make the retirement savings stretch longer," says Sherman Doll, president of wealth-management firm Capital Performance Advisors in Walnut Creek, Calif.
At the same time, resist the temptation to bet big on individual names. If you're trying to get caught up, risking huge losses probably won't help. "The inclination for many would be to take on more risk hoping to make up ground with a big score on their investments," says Daniel Sexton, chief executive officer of Newport Beach (Calif.) financial planning firm RS Crum. "Nothing can be further from the truth."
3. Cut costs on investments, too
Just as proper diet and exercise are good for your health, reducing expenses is one obvious way to save more for retirement. People looking for bargains can find them in all sorts of places—even within their own investment portfolios.
Chip Simon, president of Poughkeepsie (N.Y.) financial planning firm Taconic Advisors, suggests investors should think of their portfolio as a business. "Keep it low-cost like any other business," Simon says. "Stay away from high-commission products and inappropriate products that don't necessarily fit into a plan for you."
Consider swapping out high-cost mutual funds for low-cost, no-load funds, such as index funds. Also watch out for commissions if you trade individual stocks. Making frequent stock trades could end up costing more than it's worth.
4. Embrace automation
Now that you've got your retirement plan back on the right track, make it last. Your employer probably already makes 401(k) deductions automatically. You can also sign up with your financial institution to have money transferred electronically each month from your checking account into an IRA or taxable account.
When savings pile up without any action from you, it's very hard to "forget" to save, financial planners say. "If it happens automatically you are more likely to keep up with the savings habit, rather than waiting to see if you have the money at the end of the month," says Lauren Gadkowski, a financial planner with Personal Financial Advisors in Covington, La.
5. Rethink your mortgage
Your house could help you save a little extra for retirement, too. If you have substantial home equity, you might want to look into refinancing your house and investing the difference in stocks and bonds, recommends Ed Fulbright, a Durham (N.C.) financial planner. Over a 15-year time frame, investors would have a good chance of boosting their investment returns, Fulbright says.
In fact, paying off your mortgage before retirement might be an outmoded ideal, as long as you get a fixed interest rate. Keeping a mortgage into retirement can help protect against inflation, says John Scherer, principal of Trinity Financial Planning in Madison, Wis. "If you're 50 years old and get locked in, and inflation goes up over time, you're paying off that mortgage with cheaper and cheaper dollars," Scherer explains.
There's no magic solution for workers who have fallen behind in their retirement savings, experts say. But the sooner you can start the "catch-up" game, the better off you'll be.