Ways to Catch Up on Your Retirement Savings

June 29, 2012

Rande Spiegelman
CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research

If you're behind on your retirement savings, you aren't alone. Whether it's due to bear-market setbacks, getting off to a late start, or other reasons, a lot of people are trying to catch up on their retirement savings. Fortunately, there are plenty of actions you can take right now—and even after retirement—to help maintain a standard of living you're comfortable with. And in an era when traditional workplace pensions are disappearing and Social Security benefits may be reduced, your personal commitment to retirement planning and investing may be what makes the difference for you.

How much do you need to save?

If you're an investor with a conservative to moderate risk tolerance and you want a high level of confidence that you'll maintain your inflation-adjusted standard of living for 30 years, we suggest shooting for a portfolio approximately 25 times as large as your first-year withdrawal. This translates into roughly a 4% withdrawal rate in the first year of retirement, adjusted for inflation thereafter¹.

That may sound ambitious, depending on how far you are from retirement, what you hope to spend and how much you've already saved. But the target above assumes a portfolio big enough to let you increase your first-year withdrawal each year for inflation with a high level of confidence (90% probability) that the money will last for 30 years. You may settle for a lower probability of success, work longer or spend less. Or a combination of trade-offs could work well.

10 ways to catch up on retirement (or make the most of what you have)

• Spend less and save more now. It's as simple as it is unpopular. Create a budget and put your expenses under the microscope. Earmark your next raise and/or bonus for retirement savings. You also may be able to consolidate loan balances into lower-cost, and potentially tax-deductible, forms of debt.
• Max out your 401(k) or other employer retirement plan, especially if you receive matching contributions. If you're age 50 or older, make catch-up contributions (see table).
• Contribute to a deductible traditional IRA or a Roth IRA, if you're eligible. People 50 and older can also make IRA catch-up contributions.
• If you're self-employed, talk to your CPA about small-business retirement account options such as an Individual 401(k), SEP-IRA, Qualified Retirement Plan (QRP)/Keogh or SIMPLE IRA. You can even set up a defined benefit QRP. Schwab's Personal Defined Benefit Plan provides a turnkey solution, including the actuarial computations.
• Save extra money in personal taxable accounts, if you've maxed out tax-advantaged accounts.
• Spend less in retirement. We suggest you plan to need as much in retirement as when you were working, but you might be able to get by with less—especially if your mortgage is paid off, the kids don't move back in and you don't face dramatically increased medical costs. 
• Postpone retirement so you have more time to try to build a bigger retirement portfolio and shorten the time you'll rely on savings. You can also increase your potential Social Security benefit by waiting to receive payments (up to age 70).
• Work part-time. Many retirees find they enjoy the social interaction and sense of purpose as well as the income.
• Consider tapping into your home equity as an additional source of retirement income. You may scale down to a smaller home in retirement and pocket the difference.
• Finally, you could settle for a lower probability that your portfolio will last. There's nothing magic about a 90% confidence level, although we think it's a worthy goal.

Words of caution

Be careful about ramping up portfolio risk to try to meet your retirement goals. Unless you were irrationally conservative to begin with, you can't magically make yourself more risk-tolerant. Also, shoot for a realistic rate of return—which may be lower than the high-single-digit returns that many of us have come to expect from our stock portfolios.

At Schwab, our long-term outlook on stock and bond market returns is significantly lower than the historical annual compound returns for the 1970-2011 time period, for two reasons. First, we expect lower-than-average inflation in the future. Second, we expect lower interest rates to persist.

In order to cope with a prolonged low-rate environment, we recommend staying diversified and sticking with your long-term asset allocation plan to potentially maximize expected returns for your level of risk.

You can try crunching the numbers yourself with Schwab's . If you're a Schwab client, you can log on to access a more detailed Retirement Planning Calculator under the Tools & Calculators tab. Or ask your Schwab consultant to help you put together a prudent retirement program. The important thing is simply getting started.

1. For more details, see Retirement Spending: The 4% Solution.