Haven’t Saved For Retirement? Here’s How You Can Catch Up

It's never too late!

Are you saving enough for retirement? You can find the answer one of two ways. You can seek out one of the dozens of online calculators that will give you an estimate of how much you’ll need based on your income, your current savings, and the age you want to retire, and a bunch of other information. Or you can use this handy rule of thumb: if the question Are you saving enough for retirement? causes you to break out in a sweat, you are in trouble. 


You’re not alone, of course. A basic rule of thumb for retirement planning is that you’ll need to have enough money from your savings and Social Security to cover 80 percent of your current spending. So if you’re spending $75,000 a year, you’ll need $60,000 a year, or $5,000 a month. You might get $2,000 a month from Social Security, so you’ll be withdrawing another $3,000 a month, or $36,000 a year, from your savings. If you expect to live for 20 years after you retire, you’ll need $720,000, according to this extremely rough math, ignoring other factors like inflation and potential investment growth.

The good news is that through the magic of compound interest, you can reach what seem like unattainable savings goals. If you contributed $500 a month to your 401(k) for 45 years (eight percent of a $75,000 salary), and that account earned five percent annually (while performance is never guaranteed, this is the low end of what 401(k)s tend to earn on average), you would end up with over $958,000. 

The bad news is…well, what if you didn’t contribute to your 401(k) as much as you should have in your 20s, either because you didn’t have the spare money or because you were having too much fun? Or what if you were hit with an emergency and needed to withdraw some of that money? There are all kinds of circumstances that might lead you to be behind in your retirement savings. But you can always catch up. Here are a few tips: 


Aggressive budgeting can bail you out 

Saving for retirement is in one sense pretty simple: You just need to put away money every month. If you haven’t been doing that, you still need to put money away every month, but you need to up the amount you’re saving if you’re playing catchup. Say you’re 35 years old and earning $75,000, as in the above example. But you only have $10,000 saved for retirement—in 32 years, when you’ll be retirement age, that nest egg will be just $48,000, assuming five percent interest. If you put in $500 a month, you’ll be just short of $500,000, probably less than you’ll need. But if you can find a spare $400 a month on top of that additional $500, you’ll end up with $860,000.

Beyond decreasing your spending, though, now might also be a prime time to consider asking for a raise at work. Employers, in an attempt to retain talent in the midst of the so-called “Great Resignation” are loosening the purse strings a bit—as many as one in three employers expect to pay more in salary this year. In this wild job market, it might behoove you to ask for more pay, and store that away. For our theoretical employee making $75k, even a modest raise can impact the bottom line in a positive way.

We’re using these numbers only for example purposes—everyone’s situation is more complicated than this and you should sit down and sort through your own finances to determine your goals and how much you’ll need to spend. But the bottom line is catching up to a retirement goal means (are you ready for this?) putting more money away. Go through your budget with a fine-tooth comb and see what fat you can trim. That might mean cutting down on meals out, or shopping at less expensive stores for clothing and groceries. Maybe you eliminate some of your streaming subscriptions, which, nowadays, seem like they can number in the dozens. Can you spend a vacation in your town instead of shelling out for flights and hotel rooms? 


This is common advice, easy to give but painful to follow. Cutting back on luxuries can make you feel cramped and frustrated, even if you intellectually know you need to save money instead of spending it. If you have difficulty tracking your spending, there are apps that can help you, like Betterment’s very handy all-in-one financial dashboard. On it you can see your net worth, connect with outside accounts, add shared accounts, watch the way your money moves (maybe spend less on drinking?), and view your overall performance. Watching your wallet can be as sucky as it seems, but on the other hand following along with the dashboard can give you a sense of control, which never hurts and can even build confidence. 


Your money should be earning money 

To clarify, when we say “savings” we do not mean a savings account. Your retirement savings should be in an investment account where it can grow. The return on these accounts can fluctuate from year to year and quarter to quarter, but over time, it will add up: a single extra point of interest, compounded annually over decades, can result in you accumulating an extra tens of thousands or hundreds of thousands of dollars.

Your employer may have a 401(k) program; if they do, contributing to that is one of the simplest “set it and forget it”–styles of retirement saving strategy. If this program includes matching funds from your employer you should be contributing as much as you need to get the maximum employer match—if you aren’t doing that you might as well just boil some water, dump some cash into the pot, and make a hearty stew with your money. 


But anyone can create an individual retirement account (IRA) and put money in it. Betterment offers some great options, including a traditional IRA (which can allow for pre-tax contributions and which is taxed upon withdrawal), a Roth IRA (to which you make after-tax contributions), and a simplified employee pension plan (SEP), which can be useful for self-employed people. Betterment’s tools can guide you through the process of figuring out how much you’ll need to save by what age, and how much you should be saving. You can also make an appointment with one of their certified financial planners to get personalized advice.

It’s never too late

One recent survey of workers about retirement found that seven in ten were “somewhat” or “very” confident about their ability to afford retirement, but 44 percent were just guessing about their retirement needs; only 13 percent used a worksheet or retirement calculator to figure out what they would need. So many people are putting money away in an IRA but not necessarily with a good idea about whether it will be enough. And the future is unwritten—as the pandemic has taught us, you never know when events beyond your control may cause you to lose your job or disrupt your ability to save. 

So you may end up needing to boost your savings as you near retirement, which isn’t necessarily the end of the world. The IRS allows people age 50 and over to make additional “catch-up” contributions to 401(k) accounts. And no matter how late you start saving in earnest, having some money in an interest-bearing account for a few years is better than nothing. In a worst-case scenario, you may have to delay retirement by a few years—currently, waiting until you are 70 increases your Social Security monthly payments. (And of course, working longer allows you to put more into savings.) Or you might find that you don’t have the retirement income you hoped for and have to scale back your lifestyle somewhat. In that scenario, your savings won’t be enough to live on, but they can help cushion the impact of life after work. It’s never too late to invest in your future self.  

Rate of return is assumed to be compounded annually. Hypothetical examples are for illustrative purposes only. All events, persons and results described herein are entirely fictitious and amounts will vary depending on your unique circumstances and factors not necessarily accounted for here, such as market volatility, inflation, advisory fees, reinvestment of dividends or earnings, etc. Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Betterment or its writers endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise.