The Best Ways to Play Catch-Up

Feeling behind in savings is a common concern of clients we meet. Some think they're behind, but in reality, they have plenty of time to get into a solid position. You may think you are too old—past 40 or even 50—but it’s never too late. The key is to get your financial house in order ASAP and start moving in a positive direction! So, how do you catch up?

More Margin

The truth is you need more margin so you can sock more money away. Only two ways exist to get more margin: either increase your income or decrease your expenses. After we understand your personal and financial situation, we can pinpoint where you need to start.

Is It My Income?

Occasionally, your income isn’t giving you enough wiggle room to save more.

• Maybe you aren’t getting amply recognized for your work through annual salary increases. Is your job at the right place or in an industry where you have room to increase your income? We can be a sounding board for where you are and where you might want to go.

• Being a one-income family can be part of the picture, too. I LOVE the idea of families having a stay-at-home parent. But depending on your situation, you might need to set that value aside for a season to get on track. It doesn’t have to be all or nothing in this respect, either. Think outside the box about hours of availability and location. A remote job in customer service might give you the flexibility to take calls on your terms and earn money from home. What about watching other children? Taking on one or two others for part of the day could bring several hundred dollars a month of additional income and not cause you to sacrifice all of your desire to stay home.

• Another possibility is looking for additional side-work. I took on several side jobs for a season a few years ago when we wanted more margin to supercharge building our emergency fund. We did this so we could get cruising on investing afterward. I landscaped, worked a festival, resolved computer problems for hire, and, most significantly, delivered food at night and on the weekends. Together, these endeavors brought in over $1,400 a month of extra income.

How Do My Expenses Compare?

Nothing will steal more of your income than spending more than you make.

• If you’re still carrying credit card and other consumer debt and are in your 40s and 50s, it’s time for a change! We have a debt calculator to help you get a plan for snowballing your debts to $0 and free up more money to save.

• Are you having too much taken out of your paycheck for workplace benefits, which don’t benefit you, or taxes, only to get a boatload back at the end of the year? We can help with that! We’ll review your paystubs and employer benefit guide and perform a withholding analysis to optimize how much you have available.

• Have you considered downsizing your home or moving to a more affordable area? If your children are out of the house, and you don’t need the space for your family anymore, the savings from reduced housing costs can significantly boost your retirement savings. When you downsize, aim for a new home that puts some of the closing money in your pocket which can go towards savings or putting the final nail in your debt coffin, even your mortgage. Think of how much you could put aside if you don’t have one of those!

• What excessive expenses do you have? How’s your grocery and restaurant spending? Do you have consistent, unplanned spending habits? I bring up these areas because they can be the largest culprits of overspending. We have helpful gauges to see if your spending aligns with typical households. The best way to be intentional is with a budget where you give every dollar an assignment.

Honing all these areas creates additional cash flow that will be part of moving your savings needle higher.

More Savings

What does this margin do? With all this extra margin, we want you to aim to increase your savings rate to at least 15%. We’ll help you figure out the best mix of contribution types, whether it be to a workplace 401k plan, IRA, or taxable investment account. All are potential locations for your newfound margin.

Picture of 15%

So, what can you achieve if you didn’t start saving earlier in life? Let’s say you start at age 40. If you make $100k and save 15%, here’s what that could look like.

• $100,000 * 15% = $15,000 per year saved

• $15,000 per year, growing at an average of 8% per year from age 40 to 67 = $1.4 million

• Withdrawing 4% of $1.4 million per year translates to $56,000 of yearly income at age 67

That’s substantial progress you can make if you can free up the margin to make it happen. The sooner you start, the further along you can get.

Really Playing Catch-Up

Hopefully, as you progress through your 40s and 50s, you’ll have even more margin as your income continues to grow, and you’ll be able to take advantage of catch-up contribution limits. Once you are over 50, the tax code allows you to set aside $7,500 additional inside workplace retirement accounts and $1,000 inside IRA accounts per year. With a taxable investment account, though, there’s no limit to what you can set aside.

What About My Returns?

Your compounded annual growth rate (CAGR) significantly affects how fast your savings will grow. The rule of 72 approximates how long it will take your savings to double. If you earn 5%, your nest egg will double every 14+ years. However, if you can withstand the more difficult-to-stomach variability of a portfolio that will earn 10% per year, your money will double every 7 years, give or take. Big difference!

In this context, it’s important to understand the difference between risk tolerance and risk capacity. Risk tolerance is your willingness to psychologically navigate the ups and downs that are inevitable with investing, riding the waves. Risk capacity, on the other hand, is the measure of the risk you must take to achieve your goals. It’s dependent on concrete facts like income, savings, and how long you have to reach your goal. Here’s how that plays out.

Maybe you are risk averse. If you see a chart like this, with the maximum loss in the tens of thousands of dollars, you might freak out and say, “No, Thank You.”

You’ll take your 5% return on a CD or money market fund and sleep better at night. That’s risk tolerance. But what if, based on where you are (income, savings, and time) and the cost to fund your retirement (your goal), you need a future sum of money far greater than a 5% CAGR will create? That’s risk capacity. You may be naturally conservative, but to achieve your retirement goals, you have to take on greater risk to achieve the returns necessary to meet that goal. This is where the rubber meets the road when designing a portfolio and asset allocation together with you.

Executing the Catch-Up Plan

You do the hard work of increasing income, reducing expenses, and creating margin, and we’ll show you the path to get those hard-won savings as close as possible to your goal with the most favorable risk possible. Ultimately, you have to decide what you’re willing to sacrifice now for margin and the level of risk you can endure to fund your retirement goal. Nothing is guaranteed, but we can be pretty sure if your goal is lofty and your investments are too safe, you may not get to where you need to be. We’ll help you understand how markets work and talk with you through the emotions that can be strong. Our goal is to be that strong and steady presence to help you stay the course. Interested in having a conversation about how we can help? Reach out today.