There's no getting around it. The earlier you start investing, the less you need to save and the more you will have when you retire due to compounding growth. But many people start investing late for a number of reasons. Being told you should have started earlier doesn't help you, and is actually quite discouraging. Instead, let's talk about some actionable tips to improve your situation and help you take control of your financial future.
Know Your Numbers
One of the most important things to do if you start investing late is to take a realistic look at how much you need to invest to reach your goals. You may only need to make a slight adjustment using one or more of the strategies below. However, if you are just starting to invest, chances are you need to set aside more than you think to meet your goals. It may be scary to take an honest look at your financial future, but knowing where you are and where you need to be will help you determine what measures are necessary to meet your goals.
You can use our free calculators to figure out your goals. You can also check out these posts on Facebook, Instagram, or Pinterest to get a quick estimate of how much you need to save. Our free investing course covers basic retirement planning principles on the page titled "Know Your Numbers", which can help you understand how to determine these goals and why they are an essential part of retirement planning.
Once you have a realistic idea of how much more you need to invest for retirement, you can consider one or more of the following options.
Keep Working
If you are behind on your retirement goals, you can always plan to work a few more years and retire a little later. This will give your investments time to compound and grow. It will also allow you to contribute to your retirement rather than drawing down on your investments.
For example, say you need $500,000 in your retirement portfolio to provide you with $20,000 in annual retirement income (not including Social Security). If you are starting to invest at age 40, you need to invest $659 per month to meet your goal at age 65 (assuming a 7% return). However, if you wait until 70 to retire, you only need to invest $442 per month to get to the same goal. And if you contribute $659 per month until you are 70, you are likely to have more than $745,000 in your portfolio instead of $500,000. This will give you almost $10k more in annual income. Time can make a big difference in your goals.
You could also supplement your retirement with a part-time job doing something you find enjoyable. By having additional income, you won't need to withdraw as much in retirement, giving your portfolio more time to grow.
The longer you work or bring in income, the easier it will be to delay taking Social Security. While this decision may not be the best for everyone based on their longevity and individual finances, delaying Social Security until age 70 will give you the largest inflation-protected benefit in retirement. Having a larger Social Security benefit will likely be helpful if you have a smaller retirement portfolio because you started investing late.
Lower Your Expenses
Cutting back on your expenses will allow you to invest more money while you are working. It will also help you determine your essential expenses in retirement. If you can live on less, your money will last longer.
You can consider some creative ways to reduce your expenses, such as moving to a less expensive area, downsizing your home, or getting a roommate. Focus your energy on big-ticket items like shopping around for lower insurance premiums or a cheaper car or apartment. This will be more effective than cutting your favorite inexpensive streaming service.
Paying off debt will also reduce the amount of money you need each month in retirement. However, it is vital to balance investing and debt payoff. If your interest rates are low, you may benefit more from investing extra money now.
Make More Money
Budgeting is often emphasized when you need more money, but don't forget that there is another option: make more money. Consider asking for a promotion or a raise. It can be intimidating, but this post by Department of Adulting provides great tips on how to ask for a promotion.
Making more money will increase your contribution to a retirement account because contributions and matches are often based on a percentage of your income. If your pay has gone up, that same percentage represents a greater dollar amount being contributed and a greater dollar amount being matched by your employer. Additionally, with a larger paycheck, you may be able to increase the percentage of money you are investing.
If you cannot increase your pay through your current job, you could start a side hustle or get a second job. There are many ways to bring in some additional cash. You can try selling refurbishing furniture, online bake sales, dogsitting, translating documents, gig work, or freelancing. Side hustles can increase your current income and may also continue to provide cash flow after retirement.
Invest More Money
Commit to contributing money to your investment accounts. Take advantage of any employer matches to increase your retirement contributions. Even if you don't have an employer match, try to increase your monthly contribution. Automating your contributions is a good way to make sure this happens each month before you see the money in your paycheck.
Some employer retirement plans allow you to increase your contribution by 1% each year automatically. You may not notice the difference if you get a yearly raise. If you don't have additional money available to invest on a monthly basis, you can contribute part of a bonus or tax return to your investment accounts.
Investors who are older than age 50 can take advantage of catch-up contributions that allow you to contribute more to your retirement accounts than the normal limits. Check the new limits each year to see how much more you are allowed to contribute.
Ask A Professional
Find a fee-only planner on XY Planning Network, Fee Only Network, Advice-Only Network or Hello Nectarine to help you make a realistic, personalized retirement plan. They can provide important insight into tax planning, expenses, social security optimization, and potential income sources. Tax planning can be particularly helpful because it can help you strategically plan from where and when you should withdraw money in order to minimize your taxes. Less money paid in taxes means more money for you in retirement.
Find a planner who offers a flat price or hourly rate for a financial plan. Plans will likely cost $1-3k but can give you peace of mind and essential insights about what you need to prioritize. Avoid paying an advisor an assets under management (AUM) fee to manage investments. This fee is often 1%, which sounds small, but can seriously reduce the amount of your portfolio over time.
If financial planning seems too expensive for your budget, explore free financial planning options that may be offered through financial institutions you work with already. Your work retirement plan may include an annual consultation with a financial planner. Some financial service providers or credit unions may also include access to financial planners. Utilize free apps such as Empower (formerly Personal Capital) to give you general projections of your retirement portfolio. You can also contact non-profits to see if they provide access to financial planners or financial counselors based on income or demographics.
A financial planner can provide great insight and technical knowledge, but at the end of the day, your finances are your responsibility and the consequences of good or bad decisions will be experienced by you. A good planner will take the time to answer your questions and explain why they are recommending a strategy. So take the time to understand your finances. It is one of the best things you can do to take care of yourself.
Find A Community
You are not alone if you are starting to invest late in your career. Ten percent of investors start investing after age 45, and only 45% of nonretired adults in their 40s and 50s feel that their retirement is on track. Consider joining a community of people online or in person who are going through a similar experience. Sharing your successes and progress with each other can be motivating. They may also be able to share resources to help you in your journey.
A word of caution: It is important to remember that the people in these communities are often not financial professionals. Verify any information or advice independently with a reliable source or your financial planner. Also, be careful about sharing personal information.
Most members will be there for the same reason as you - to be part of a community that supports each other on their investment journey. However, it is possible that someone could join the community to sell products such as whole life insurance or annuities to individuals who are worried about retirement or for fraudulent purposes such as identity theft. So be cautious and continue to educate yourself about your finances. Despite these risks, a community can be helpful and rewarding while you are working on your goals.
Starting To Invest Late Is Better Than Never
Bestie, I know that starting to invest late can be overwhelming, but you can do this. Face down the fear that you won't have enough and make a plan to address any shortfalls. Take that first step today - determine your retirement goal and how close you are to your goal. Once you have that information, you can reflect on how you want to close the gap. It will likely take some work, but Bestie, you've got this.
Comments