Catch-Up Retirement Planning-Part 1

Baby boomers and younger generations face a “perfect storm” of retirement planning challenges: a financial squeeze on Social Security, pension plan underfunding, and inadequate savings-and often high expenses-in 401(k)s and similar defined contribution plans. What to do? For many people, the answer is catch-up retirement planning.
Catch-up retirement planning strategies basically fall into one of two basic categories:
  • Take action before retirement to increase retirement savings
  • Take action after retirement to decrease the amount of savings required
     
    Below are five catch-up retirement planning strategies in the “increase retirement savings” category:
  • Increase Contributions to Retirement Savings Plans- Saving 1% more of a $35,000 salary at age 40 will result in $35,945 of additional savings at age 65 assuming an 8% average annual return and 3% average annual pay increases.
  • Slash Spending and Debt– Reduced spending can free up money to accelerate debt repayment. Use PowerPay (www.powerpay.org) to create a debt repayment calendar. Adding even small amounts to payments on consumer debts will save repayment time and interest and previous debt payment amounts can be added to retirement savings.

  • Moonlight (a.k.a., “Side hustles”) for Additional Income – Freelancing provides an opportunity to earn money for catch-up investing. It can also sharpen job skills and provide a “bridge” to post-retirement employment opportunities.

  • Seek a Higher Investment Return– The higher the return earned on investments, the less that needs to be invested. The trade-off, of course, is increased risk of loss of principal but time diversification helps to reduce this risk.
  • Maximize Tax Breaks– Compound interest works best when income taxes are eliminated (e.g., tax-free bonds), reduced (e.g., long-term capital gains on the sale of securities), or deferred (e.g., 401(k)s and traditional IRAs).
 

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