How Can a Late Start On Retirement Planning Be Addressed?
When it comes to retirement planning, it's never too late to start making smart financial moves. We've gathered insights from Financial Planners and Senior Advisors on strategies to help clients who began saving later in life. From implementing the 'Second Best Time' strategy to tracking progress and celebrating small wins, here are the top ten approaches these financial professionals recommend.
- Implement 'Second Best Time' Strategy
- Balance Current Enjoyment and Future Savings
- Maximize Tax-Advantaged Catch-Up Contributions
- Accept Reality and Take Action
- Set Realistic Expectations and Eliminate Debt
- Redirect Future Raises to Savings
- Start Small and Increase Savings Gradually
- Clarify Goals and Automate Savings
- Adjust and Prioritize Controlled Actions
- Track Progress and Celebrate Small Wins
Implement 'Second Best Time' Strategy
One approach I've taken to help a client with a late start on retirement planning is the 'Second Best Time is Today' strategy. The saying goes, 'The best time to start was yesterday, but that makes the second best time today.' This approach focuses on taking immediate and decisive action to make up for lost time.
1. Define Clear Goals: We begin by discussing the client's retirement goals—whether it's maintaining a certain lifestyle, relocating, or leaving a legacy. Understanding their vision helps us create a targeted financial plan.
2. Create a Customized Financial Plan: With clear goals in mind, we develop a financial plan that outlines exactly how much they'll need to save and invest to achieve their retirement objectives. This plan becomes our roadmap, guiding every financial decision from this point forward.
3. Assess Savings Viability: Next, we analyze their current financial situation to determine how much they can realistically save each month. This often involves finding ways to increase income, reduce unnecessary expenses, or both. We also explore options like maximizing contributions to retirement accounts, especially if they're eligible for catch-up contributions.
4. Implement a Catch-Up Strategy: We prioritize high-impact actions, such as automating savings and investment contributions, to ensure they're consistently building their retirement nest egg. We also consider more aggressive investment options, balanced with their risk tolerance, to help their savings grow faster.
5. Regular Progress Reviews: Finally, we schedule regular check-ins to review progress and make adjustments as needed. This ongoing support ensures that the plan remains aligned with their goals and that they stay on track despite starting later than ideal.
By focusing on what can be done today, we turn what might seem like a late start into a proactive and empowering journey toward a secure retirement.
Balance Current Enjoyment and Future Savings
The key to supporting clients with a late start is to first help them understand where they are currently, cash-flow-wise, followed by their 'sleep at night' liquid cash position. We explore finding a balance between enjoying life now but understanding that if they'd like a similar lifestyle in retirement, carving out a sustainable, planned savings amount based on their remaining working years will help them achieve that goal. Visual tools are helpful.
Many clients have the resources but appreciate the expertise around which buckets to focus on and why. We often walk them through the interest rates of various debts versus what their investment accounts are or could be earning, and the all-powerful time value of money! In addition, we look at their tax brackets and help them understand pre- and post-tax savings plan options today and into the future. The funds to save for retirement could come from (excess) debt payments on low-interest debt or utilizing cash to pay off high-interest-rate debt. Monthly cash flow is then shifted to rebuilding emergency savings and retirement.
Maximize Tax-Advantaged Catch-Up Contributions
For women nearing retirement who feel they've gotten a late start on planning, one effective approach I've used is to implement an aggressive catch-up strategy focused on maximizing tax-advantaged accounts.
First, we take full advantage of catch-up contributions in 401(k)s and IRAs. For those 50 and older, you can contribute an extra $7,500 to your 401(k) in 2024, bringing the total limit to $30,500. For IRAs, you can add an extra $1,000, for a total of $8,000.
Next, we look at potentially downsizing or relocating to reduce living expenses and free up more money for savings. This can be an emotional decision, but it often provides a significant boost to retirement funds.
We also explore options for delaying retirement by a few years if possible. This serves the dual purpose of allowing more time to save and increasing future Social Security benefits.
Lastly, we focus on creating additional income streams, such as part-time work or monetizing hobbies, to supplement savings without compromising quality of life.
Remember, it's never too late to improve your financial future. With the right strategy and commitment, you can make significant progress in a short time.
Accept Reality and Take Action
This is a challenging equation to solve, but it starts with understanding two key factors. First, recognize and accept your current situation. There's no benefit in dwelling on frustration or regret over where your financial planning stands today. Second, take action. Look for opportunities to save more and take advantage of options like 'catch-up contributions' through your company retirement plan or IRA.
While your reality might mean that retirement isn't exactly what you envisioned, it doesn't mean you can't still have a fulfilling life during your golden years. You can find purpose and joy in your retirement years by contributing to your community, spending quality time with your family, and pursuing activities that bring you meaning.
Set Realistic Expectations and Eliminate Debt
The first step is to get the client to accept that they are behind and to set realistic expectations. That may include the need to work until age 70 to maximize Social Security benefits. This approach also provides additional time for assets to compound. Taking advantage of catch-up provisions to save as much as is affordable is another key. I also strongly encourage my clients to focus on eliminating as much consumer debt as possible before retirement. The income needed in retirement can be greatly reduced with little or no debt.
Redirect Future Raises to Savings
The most important thing I can help a client with if they are late to saving for retirement is to coach them on the mindset that 'by default, my future raises and promotions go all towards saving.' The biggest sin of omission for most people in financial planning is 'lifestyle creep' - allowing your lifestyle and spending to increase proportionately with your income.
The best way to boost savings is straight to a 401(k) from a paycheck deduction. It takes the behavior out of the process. I will also encourage clients to see if their enrollment system has an 'auto-increase' feature, where they can automatically bump up their contribution rate each year by a specified amount.
Start Small and Increase Savings Gradually
As a Financial Planner, one of the key strategies I've used to help clients with a late start on retirement planning is taking a gradual approach. It's crucial to start somewhere and start small, especially if you've never saved before. By beginning with a manageable savings amount, you can build the habit and gradually increase your contributions over time. I always encourage clients to start now, with an amount they're confident they can commit to, rather than waiting for the 'perfect moment,' which likely may never come.
Additionally, creating and regularly reviewing a budget is essential. Understanding your cash flow and prioritizing certain expenses allows you to become laser-focused on allocating as much as possible toward retirement savings while maintaining a sustainable lifestyle.
Clarify Goals and Automate Savings
A few years ago, I had a client who felt way behind on their retirement planning, and it was stressing them out. They were worried about scaling back their lifestyle, but after we sat down and went through their situation, we realized they weren't as far behind as they thought. It was all about taking a few key steps to turn things around.
First, we focused on paying off their high-interest debt and maxed out their retirement contributions, especially taking advantage of those catch-up options. We also automated their savings to make things easier. The results? Over time, they saw consistent progress, and soon, they were back on track, and their dream of a comfortable retirement became achievable again.
My advice: Start by clarifying your goals and where you stand today. Then, look for small but impactful strategies that can make a difference. It's not about giving up on your dreams but finding the path that gets you there step by step.
Adjust and Prioritize Controlled Actions
Clients come to us asking about this all the time. We start by helping them gain clarity and set expectations on their ability to draw from their savings and investment portfolios sustainably, and also the other income sources they should consider. This helps make the necessary adjustments and prioritizes actions that are in their control, instead of having to take on more investment risk to try and catch up blindly.
We want our clients to focus on their ability to save, budgeting in retirement, and being more intentional with their balance sheet holistically. We also want to help clients understand and establish their emergency cash buffer and necessary insurance, so they're not set back even further from all of life's uncertainties. Once we've set a strategy in place, it's about monitoring and executing on the day-to-day steps for clients so they realize their financial potential to retire comfortably.
Track Progress and Celebrate Small Wins
I like to share with people in this situation that all hope is not lost. From this point forward, it's important to make the most of the time you have left.
You must track your progress consistently. I like to help my clients understand where they are today, so they will know what they need to do to meet their goals. Once you have the proper mindset and understand that there's still hope, tracking your savings, spending, and investing is essential.
I empower them with tools to track their progress and provide progress reports quarterly. This allows us to collaboratively monitor progress and celebrate small wins along the way.
