Money milestones: How to catch up on retirement savings

Brian Acton


Brian Acton

Brian Acton

Contributing Writer

Brian Acton is a contributing writer at Policygenius who covers personal finance, insurance, and other topics.

Published February 8, 2021|7 min read

Policygenius content follows strict guidelines for editorial accuracy and integrity. Learn about our

editorial standards

and how we make money.

News article image

If you are worried you haven’t saved enough for retirement up to this point, you aren’t alone. Millions of Americans are in the same boat, and 15% have no retirement savings whatsoever.

You can start catching up on retirement savings if you earn income and have some time before reaching retirement age. It’s important to act quickly because the sooner you get started, the greater potential earning power your savings will have.

Here’s how to catch up on retirement savings.

1. Assess your current savings.

The amount you’ll need for retirement will depend on where you live and your financial situation. To find out how much more you should be contributing, you’ll need to figure out where you currently stand. Look at your retirement accounts, including a pension, 401(k) or any individual retirement accounts. Then total your current retirement savings and compare it to the amount you think you’ll need in retirement. That’ll help you determine how much more you need to save on a monthly basis to hit your ultimate goal.

If you’re between 30 and 50 years old you may not be relying on an inheritance, pension or other type of income (not counting Social Security) to pad your retirement fund. If that’s the case, you need to be saving for retirement on your own, said Drew Feutz, certified financial planner at Market Street Wealth Management Advisors.

“If you haven’t consistently saved 10% to 20% of your income for retirement along the way, then you might not have saved enough at this point in your life,” said Feutz.

Want more money advice delivered straight to your inbox? Sign up for our Easy Money newsletter

If you aren’t sure where you stand, here are tools you can use to get an idea:

Most experts recommend the 4% rule when it comes to retirement savings, which says you should be able to safely withdraw 4% of your savings each year in retirement, adjusted for inflation beginning in year two, without running out of money for 30 years. Feutz said the 4% rule is a good starting point to figure out how much you’ll need in retirement.

These guidelines aren’t foolproof, but they can help you get a sense of where you are and how much you need to save. Depending on your current retirement savings, you might need to make adjustments including how long you plan to work and the percentage of income you are putting away.

2. Pick the right retirement plan

If you’re already saving for retirement, you might need to increase the amount you’re putting away. Or you may be contributing the maximum to an existing plan but need more savings options. If you aren’t saving at all, you will need to choose the right plan to contribute and grow your retirement savings.

Here are some of the popular retirement plans:

  • 401(k) plans are offered by employers to help employees save for retirement. Employees can contribute pre-tax dollars from their paycheck. Those contributions are invested and can grow until they are withdrawn when you retire, when you will owe income tax. In 2021, the annual contribution limit for a 401(k) is $19,500. Some employers match employee contributions up to a certain percentage of their salary.

  • Solo 401(k) plans are a good option for self-employed workers, as they cover a business owner with no employees and their spouse.

  • 403(b) plans are similar to 401(k)s, but are offered by nonprofits like churches or universities.

  • Traditional IRAs allow you to contribute your after-tax income but receive a tax deduction equal to your annual contributions at tax time. The money in your IRA grows tax-free. The annual limit for IRAs in 2021 is $6,000.

  • Roth IRAs allow you to contribute after-tax income but offer no tax deduction. Your contributions and earnings grow tax-free and can be withdrawn in retirement or after five years without penalty.

  • SEP IRAs are suitable for businesses and self-employed workers, as you can open them even if you’re the sole employee of your business. The annual limit in 2021 is $58,000.

  • SIMPLE IRAs are available to self-employed individuals and businesses with fewer than 100 employees.

One plan may not be enough, especially if you’re already maxing out the annual limit for your current plan and you need to save more. Luckily you can simultaneously contribute to a 401(k), IRA and investment account.

“The retirement plan that’s right for your situation is the one that you will contribute to on a consistent basis,” said Feutz.

3. Adjust your retirement contributions

If you fell behind on contributions throughout your career, finding extra money in your paycheck to put toward retirement can seem challenging. Here are some ways to boost your contributions.

Take advantage of employer matching

If your employer offers a 401(k) or 403(b) matching policy and you aren’t taking advantage of it, this is where you need to start. Employer matching is free money that matches your contributions up to a certain percentage of your salary. If your employer offers this, you should contribute at least the maximum amount they match or you’re leaving money on the table.

Update your budget

Work your retirement savings into your existing budget. Adding the line item can help you determine how much you can save after paying for rent, bills, food and other expenses. If your increased savings are coming directly from your paycheck, make sure to update your income. If you are manually moving contributions to a retirement account, keep track of each contribution (even if you skip a month).

Don’t have a budget? You can create one using our simple budget spreadsheet that tallies your monthly income and expenses. To make room for your increased savings, you may need to make some spending cuts in other areas.

Automate your contributions

Many retirement savings plans allow you to automate your contributions, either directly from your paycheck or automatic deposits from your bank account. This can help you stay on track with contributions.

“Automation and removing as many decisions and as much effort as possible is key when it comes to saving for retirement. This may not be the most mathematically optimal answer, but psychology can often trump math when it comes to personal finance,” said Feutz.

Increase savings as your income increases

When you get a raise you should increase your retirement savings. You won’t miss the extra savings as much if the increase is automated — especially if you just got a pay increase.

Even a small percentage boost to your monthly contributions can dramatically raise your total potential retirement savings. If you receive a 2% cost of living increase, for example, bumping your 401(k) contributions by a percentage point will help you save more while still enjoying a 1% increase in pay.

Earn extra income

A side gig can help you earn extra income to add to your retirement savings. You could find freelancing jobs that compliment your skills, deliver food or groceries, walk neighborhood dogs and more. Retirement saving can be less strenuous on your budget when you have extra income. Here’s our guide to earning passive income.

Put windfalls in savings

When you receive unexpected or expected income, like tax refunds, cash gifts or selling valuables — put that money toward your retirement savings. The extra cash you contribute can make a big difference in retirement.

Use the catchup limit if you’re over 50

People age 50 or over can make catch-up contributions, essentially raising the annual limit they can contribute to retirement. For example, in 2021 anyone 50 or over can make an additional contribution of $6,500 to their 401(k) plans, 403(b) plans and a few others. For traditional or Roth IRAs, people 50 and over can contribute an additional $1,000 over the annual in 2021. If you’re of an eligible age, check your retirement plan for the catch-up contribution amount.

Don’t withdraw early

Early withdrawals can seriously damage your financial outlook in retirement. You may lose some upfront cash in terms of taxes and other penalties, but the real loss is the earnings you’ll miss out on by withdrawing money early and zeroing out it’s potential future value.

Hire a professional

If this all sounds a little complicated, that’s because it is. The amount you need to save depends upon your income, your goals for retirement, the amount you have already saved and the age at which you plan to retire.

Consider hiring a financial adviser, such as a certified financial planner, to help you put together a plan. This may require some upfront cost, but it can help you create a path forward to work toward your personal savings goals.

4. Start saving now

You should start saving right away once you know how much and where you want to put your money. While you should ideally be contributing the amount of money you need to reach your goals in retirement, that might not happen right away.

One way to maximize retirement savings is automating contributions, said Feutz. “ contributions are automated and the money is out of sight out of mind — it’s not available for you to spend."

Aim to contribute a certain percentage of your income instead of a dollar amount. Feutz recommends 10% to 20%, but the ideal amount depends on your age and circumstances.

“That doesn’t mean you’re going to, or have to, get there overnight if you’re not currently saving enough — or anything.” he said. “Making progress is better than trying to be perfect and ending up feeling like you’ve failed because you haven’t met that benchmark of perfection.”

Recommended reading

Here are five ways to save more for retirement in five minutes or less.

We offer a longer explanation of the different types of retirement plans.

Here’s how much you should have saved for retirement at different ages, expressed in terms of your salary.

We give advice on finding the right type of financial advisor.

Image: Jeniffer Araujo