How do I catch up with my retirement savings after 30 years?
Select’s editorial team works independently to review financial products and write articles that our readers will find useful. We may receive a commission when you click on links to products from our affiliate partners.
I didn’t think about retirement savings when I started my freelance career in my early twenties. I was more concerned with things like increasing credit card debt, locating the best discount groceries, and juggling part-time gigs to make my side efforts work. Saving in general, and especially retirement savings, was a luxury I couldn’t afford.
And then, in the blink of an eye over the next decade, I was 30 without a penny saved for my golden years. It struck me one day, as most transitions to adulthood do, that I wasn’t properly preparing for a prosperous future. And that’s when I turned to help from a professional financial advisor.
I met Keith Fichtner, Edward Jones’ financial advisor, when he was doing a financial presentation at the coworking space I was using in Missoula, MT. With my recent revelations about my retirement and a successful few years as a full-time travel writer, his presentation piqued my interest and I followed with a reunion.
Fichtner’s advice to me on the first day of our meeting is the same he gives to anyone walking through his door: “The first step is to understand your financial situation,” Fichtner stressed again in a recent meeting. in person at his office.
Understanding your financial situation includes tallying down your monthly expenses, current debt, and discretionary income. “The first step is to make the financial situation known as a whole. Funding the retirement account and recommending suitable investments – that’s the easiest part of my job, ”Fichtner said.
I was quickly approaching the age of 31 when I first met Fichtner – my independent income was stable, my debt was happily decreasing, and I could make monthly contributions to my future without buying exclusively from the discount grocery store. . With this information at hand, Fichtner helped me start a game plan for my distant retirement.
My first question was, what is the magic amount i should aim for if i want to retire around 65? And like most financial forecasts, the answer depended on several approximate values. Fichtner mentioned that the goal was previously $ 1 million, but forces like inflation and personal retirement goals can increase that number for many people. Some therefore use a retirement calculator to estimate their future cost of living.
The feeling of being late for the party immediately struck. As a self-employed person, a traditional IRA or a Roth IRA were my most logical choices for a retirement savings account. Ideally, I would make contributions to maximize the limit of $ 6,000 per year, or $ 500 per month, broken down into smaller monthly amounts.
Fichtner calculated for me: If I could make the maximum annual contributions starting at age 31, with an average return on investment of 6% and a 3% increase in inflation, I would be sitting on about $ 700,000 (pre-tax ) with a Traditional IRA when I turned 65. (You can use a compound interest calculator to calculate this hypothetical value for your own situation.)
RELATED: How a millennial shot his net worth to $ 500,000 at age 31
While $ 700,000 is a huge change, I was struck by how my future pension fund balance was considerably far removed from the $ 1 million pension amount Fichtner introduced – and with inflation, who knows what $ 700,000 will be worth in 2054.
And furthermore, while I was finding success in freelance writing, I had yet to sell my bestselling novel or receive a Netflix adaptation for my work. So with my limited budget, I felt more comfortable starting with a smaller monthly contribution. I started setting aside almost $ 250 per month, which is half of that $ 500 goal. And with the same interest and inflation as mentioned above, that monthly contribution amount would bring me closer to $ 320,000 by my 65th birthday.
When I first read these numbers, I had the strange feeling of one of those dreams where you are always running and never being able to catch up. Even though Social Security will line my pockets when I’m in my sixties, it has suddenly become a real possibility that I don’t have enough funds for the travel lifestyle that I hope to continue once my hair is over. striking silver.
Fichtner, seeing the panic in my eyes, met my calculated worries calmly.
“Something is better than nothing at this point,” he reassured me. “There are other retirement vehicles and ways to catch up.”
Some of these methods include using my small business to set up a simplified employee pension plan (SEP) or a 401 (k) plan for one person. And when I’m 50, Fichtner explained, I can start making catch-up contributions with an increased annual cap of $ 7,000 on my IRA contributions, compared to the normal $ 6,000.
RELATED: You can still make 2020 contributions to your IRA until the new deadline of May 17 – don’t miss your chance
So aside from the angst of imagining my life at 65, we started to focus on relatively short-term goals. More precisely, what I could start to contribute to get out of my thirties with more security at retirement than when I entered. And with my budget to comfortably contribute $ 250 per month, we went from there.
As it stands, at 40, I expect to have about $ 46,000 in retirement savings. I’m not ready to be a millionaire, but just as my freelance career has done over the past ten years, I’m confident that my retirement abilities will turn into something bigger as well.
Plus, as Fichtner said, something is better than nothing, and $ 46,000 is way more than what I started with.
Editorial note: The opinions, analyzes, criticisms or recommendations expressed in this article are those of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.