Dec 29, 2024
Before retiring, it's critical to make sure you have enough money to last you through your golden years — but how do you know if you’re saving enough when you’re still only halfway through your career?
Let’s say you're 43 years old, making $84,000 a year, and have $79,000 set aside for your retirement so far. You probably still have roughly 20 working years left, assuming you opt for a “traditional” retirement. If you keep saving at this same pace are you doing enough?
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In a perfect world, you’d actually have more than three times your annual salary saved for retirement by the age of 40, according to Citizens Bank. This means that $79,000 is far short of that “magic number.”
However, according to data from the U.S. Census Bureau, the median household income in 2023 was $80,610, so the reality of your situation definitely isn’t unique. So, don’t panic just yet — there are some ways to catch up.
What to do if you're behind on retirement savings
When you're far behind on retirement savings, it may seem like a pipe dream to save even $100,000 — but if you have a roughly 20-year countdown ticking away, the time is now.
The first thing you'll need to do is set a savings goal. Fortunately, there are many ways to do that, but the simplest way is to start calculating.
Assume you'll need 10 times the amount of your estimated retirement salary. You can figure that number out by assuming a 2% raise each year until, say, age 65.
So, if you're making $84,000 now and work for another 22 years, you'd need to have saved 10 times the amount of the estimated final salary of $127,316 — which translates to $1.273 million.
If you have $79,000 already, you'd need to invest $1,569 per month for the next 22 years in order to hit that target. That's about 22% of your monthly income, which won't be easy. Still, setting a target is the first step toward making it happen.
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Next, you’ll need to make big spending cuts. While it may be painful in the short-term, it could prove quite rewarding down the line.
Consider slashing on spending and diverting the money toward retirement savings:
- Examine your biggest expenses and brainstorm ways to eliminate or reduce them
- Downsize your home, relocate to a more affordable area, or move in with a family member
- Eliminate car payments, auto insurance, and more by selling your car and switching to a bike or public transit. If that’s not feasible, trade your car in for a cheaper model.
If you’re still uncertain about how to make this work, consider bringing in a financial adviser to help you weigh your options, set a realistic budget, or further customize your retirement goals.
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How to get back on track
If all of those financial considerations are making your head spin, the good news is that you can start catching up by investing in the right accounts and taking advantage of tax credits.
If you have access to one, divert some of your pre-tax pay into a 401(k) so you reduce your taxable income — the higher your income, the greater your tax savings. And your money grows tax-free until you make withdrawals in retirement. Your employer may also offer matching contributions.
If you don’t have a 401(k) through your employer, look into opening an IRA or a Roth IRA. Decide which option works best for you and start shuffling funds into your preferred retirement vehicle.
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A traditional IRA gives you the ability to contribute “pre-tax” income and allow it to grow tax-free until you make withdrawals in retirement. However, your contribution limits are lower than what they would be in a 401(k).
As for a Roth IRA, this vehicle lets you pay taxes upfront on your contributions, so when you withdraw the money in retirement, your withdrawals and earnings are usually tax-free. However, you’re only eligible for this account depending on your filing status and income threshold, as determined by the IRS.
In 2024, the 401(k) contribution limit is $23,000 and the IRA contribution limit is $7,000. Once you turn 50, however, you can start making yearly catch-up contributions to these accounts as well. You’re allowed to contribute up to $7,500 in a 401(k) and up to $1,000 in an IRA.
And although you’d have to take on a little more risk, the S&P 500 has consistently produced 10% average annual returns over the long haul.
Another option is to work additional hours with a side hustle, so you can put away the extra cash into savings or investments.
In the end, you still might not have the luxury of becoming a wealthy retiree, but every dollar you save can get you closer to financial security and a happy retirement.
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
