Saving early and often is probably the most powerful and surefire way to achieve a comfortable retirement. Those who allow time and compound interest to work for them are the most likely to amass adequate wealth without much effort. But for one reason or another, many people just don't have another couple decades to build a retirement nest egg. Some baby boomers are even in the dire situation of reaching their 50s with nothing saved. If you need to play catch up, here are several tips to get started:
Don't worry about the contribution not being enough and just start small. Have loose change in your pocket? Save it. Get a raise? Save that too. The most important step to take is the first one. It won't be easy to start saving, but it will become much easier to come up with ways to save just a bit more each month once you are used to saving excess cash.
Utilize tax deferral options fully. Most people in their 50s who don't have enough saved for retirement should focus their attention on contributing to a 401(k) and traditional IRAs. For starters, many employers offer matching contributions, which is free money. And by deferring taxes, you can lower your current tax bill and will likely pay a lower tax rate than you would now when you take the money out in retirement. And if your earnings are low enough in certain years, you can even convert the balance in the before-tax account to an after-tax Roth account via a Roth conversion. In some cases you may be able to effectively not ever pay taxes on some of your contributions and earnings.
Also, don't forget about the catch up contributions that are available to employees age 50 and older. Those age 50 and older can contribute $22,000 to a 401(k) in 2013, a full $5,500 more than everybody else. And the contribution limits, which are indexed for inflation, are likely to further increase in future years.
Consider whether you can downsize expenses. I don't like to use the phrase "downsizing your lifestyle" because not every reduction in spending is really a sacrifice. I recently cut my cable bill and joined Netflix via their free trial offer. Aside from saving a good amount of money, our family actually spent more time enjoying the TV because we like the available shows more.
Cycle through all your expenses and try not having certain costs for a month. Try running outside instead of paying for a gym membership for a month and see how your life changes. Consider not ordering a drink for lunch and bring your own soda to work instead. You never know how one decision can change other parts of your life. You could save money and have more fun at the same time.
Don't be too aggressive with your investments. It’s tempting to increase the risk level of your investments to try to reach your financial goals faster, but that would be a huge mistake. The right asset allocation for you should be based on your willingness, need and ability to take risks. Taking a higher risk doesn't guarantee a higher return. And you just can't afford to lose whatever you have accumulated when your current nest egg is already not sufficient to fund the lifestyle you are hoping for.
Your retirement situation likely isn't as bad as you fear. A comfortable retirement isn't solely based on the financials. Much of what life has to offer is actually free, and friends and family will keep your life colorful and full of laughter. Many people are able to live a happy retirement lifestyle with just Social Security income, so don’t lose hope.
Of course, the more you can save, the better you will be able to cope with potential financial strains in retirement. So make an effort to start saving right away, even if you’re only tucking away a few extra dollars per month.
David Ning runs MoneyNing, a personal finance site that shares money moves you can make to significantly increase your chances of having a comfortable retirement. He likes to share simple changes that anyone can make, such as picking the best online savings account and figuring out whether a 0 percent balance transfer credit card makes sense.