Hopping the Hurdles Toward Retirement (the series)

When it comes to saving money for retirement, the sooner you can save the better.  But that’s not always possible.  There may be circumstances in your life that prevent you from being able to save when you are younger, and as a result you get a late start.  In this week’s blog I’ll address what things may need to be done when faced with the challenge of a late start.

Hurdle #4: Late Start

Getting a late start does not mean you will never be able to retire – it simply means you will need to plan differently for retirement.  Part of the solution may include saving more of your income now, but this is just one of several things you should consider to help overcome this challenge.

Take advantage of “catch-up” provisions

Every year the IRS sets a contribution limit restricting the amount that may be contributed to an IRA and 401(k).  The IRS also allows for additional “catch up” contributions by those ages 50 and older.  In 2010, the additional “catch up” amount is $1,000 to an IRA and $5,500 to a 401(k).  Making an extra $6,500 annual contribution could increase your retirement nest egg by more than $150,000 over 15 years (assuming a 7% annual rate of return).  If you are age 50 or older this year, take advantage of the opportunity to save more in your retirement accounts.  Learn more about “catch up” contributions at here.

Work longer

It may not be exactly what you wanted to hear, but there are several advantages to doing this.

  • You have more time to save
  • You spend less time in retirement
  • You increase retirement income

I think the first two are self explanatory, but how does working longer increase retirement income?  Remember that thing on your paycheck stub called FICA?  Part of that is your contribution to Social Security.  The earliest you may begin receiving Social Security benefits is age 62, but taking your benefit at age 62 reduces your normal retirement benefit by at least 25%.  On the other hand, you can delay collecting Social Security benefits all the way until age 70, at which time your starting monthly benefit will be its highest (see http://www.ssa.gov/pubs/10147.html).

Also, if your employer offers a pension plan, working longer may increase your pension benefit.  Similar to Social Security, you may be eligible to receive a reduced pension benefit by taking it early, so consider waiting longer before tapping into this income source.

Think outside the box

My colleague and friend Bruce Young has shared with me on several occasions the possibility of relocating outside of the United States when he retires.  It’s not because he doesn’t like it here in the U.S. (and I don’t think the IRS is after him), but rather the cost of living is so much less in other very desirable parts of the world.  Certainly there are other factors to consider than just the cost of living, such as access to quality health care, but the point is you can enjoy a great quality of life on much less than you may think.

Check out Bruce’s blog every Thursday.

Bottom line: Getting a late start does not prevent you from having a comfortable retirement.  Take advantage of your opportunities to save more, increase income benefits, and live an affordable lifestyle.

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