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How to Play Catch-Up With Retirement Savings

Here are some strategies to consider whether you're behind at age 40 or beyond.

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Sometimes, despite our best efforts, we aren't able to save as much as we hope for retirement. How can you catch up? Joining me today to discuss some retirement catch-up strategies by life stage is Amy Arnott. Amy is a portfolio strategist with Morningstar.

Nice to see you, Amy.

Amy Arnott: Nice to see you, too.

Dziubinski: First off, how can investors tell whether their retirement savings are on track?

Arnott: One rule of thumb you can use is looking at some salary-based benchmarks by age. And Fidelity has published research, which I've looked into, and I think these can actually be a pretty decent starting point for seeing if you're on track with your retirement savings. The guidelines that Fidelity recommends are that you have at least 1 times worth of savings equivalent to your salary by age 30, 3 times by age 40, 6 times by age 50, and then up to 10 times by age 67 or retirement age.

Dziubinski: If investors do find that, yes, based on my salary and based on my age I am behind, there are some things that you say investors can do in those cases. Let's start out with somebody who is 30 years old and finds out, "Yeah, I'm behind." What are some things to think about doing?

Arnott: Sure. So, this is actually a pretty common situation for a lot of people. Especially, if you're in your 20s, you might be just getting started in your career or still paying off student loans from college. But if you're able to start saving for retirement at age 30, you can still catch up pretty easily. So, ideally, you would want to be saving roughly 15% of your income for retirement, if you can. But even if that seems like too much of a stretch, just getting started with retirement savings and being consistent about it. Saving a little bit each year can help you make progress toward meeting your retirement savings goal.

Dziubinski: Let's go up the age band a little bit, and let's say you're 40, and you find that at 40 I'm not really on track with my retirement savings. What are some levers you can pull at that stage?

Arnott: Right. As you can imagine, it gets a little bit harder if you're not starting until midlife around 40, but there are a few different levers you can pull. So, one would be saving a higher percentage of your salary, so maybe 18% or so if you can manage that. Another option is maxing out your retirement savings contributions each year to your 401(k). And a third option would be taking advantage of catch-up contributions after you turn 50, which can also help you close the gap for retirement savings.

Dziubinski: Let's talk about age 50. Playing retirement catch-up the older you get and certainly by the age 50 is a little bit more difficult. What can you do if you're 50 and you look and say, "Oops, I'm behind"?

Arnott: Right. The three previous strategies I mentioned--increasing the percentage of salary that you're saving, maxing out retirement contributions, and also taking advantage of catch-up savings, which would allow you to contribute up to $27,000 this year if you're age 50 or over--can all help close the gap. But if you're not starting until age 50, you're probably going to have to also contribute savings to taxable accounts to help close the gap.

Dziubinski: And then, by age 60, Amy, if you find you have a shortfall, what are your options?

Arnott: Well, again, you can just try to save as much as you can, including in taxable accounts. But if you haven't really saved a significant amount by age 60 and you're planning to retire within the next five or 10 years, you're probably going to have to look at some other solutions such as maybe delaying retirement, continuing to work part-time during retirement, seeing if there are ways that you can cut back on your living expenses such as maybe downsizing to a smaller home. And then, another option that we recommend for people who are worried about running out of income during retirement would be possibly purchasing a fixed annuity, which would give you some guaranteed income during retirement in exchange for giving up a portion of your retirement savings to an insurance company.

Dziubinski: And Amy, in conclusion, regardless of what age you are and where you are with your retirement savings, you say that there's always something that you can do, right?

Arnott: Right. I know it can be a bit discouraging, especially if you feel like you're behind on where you should be or where you'd like to be with your retirement savings, but even taking small steps and being consistent over time can make a big difference.

Dziubinski: Well, Amy, thank you for your time today. We appreciate it.

Arnott: Sure. Great to be here.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.