Saving for retirement is, of course, a crucial financial habit for workers of all ages. However, as one draws near their golden years, it’s exceptionally significant to assess whether anticipated lifestyle expectations are in line with the funds they have saved.
I work closely with my clients in mapping their retirement readiness through various life stages, but when they are 10-15 years away from their ideal retirement age, we pressure test their goals to see how they line up with the savings they have accumulated. I cannot underscore the importance of this critical step and the power it can have on assessing whether one is on—or off — track. And, if off track, it provides enough time to reset savings tactics or re-evaluate lifestyle expectations.
For those who are a decade or more outside of retirement, below are actionable steps to take if a retirement savings plan may need extra funding.
Understand cash flow and be willing to adjust levers
At any age, it’s important to assess what goes to fixed spending—monthly expenses such as mortgage, bills, or basic living expenses—and compare with typical discretionary spending—what I’ll deem as “nice to haves.” This helps individuals efficiently and effectively get a handle on spending and saving habits and puts a spotlight on excess cash that could likely shift from the discretionary bucket into the retirement savings bucket.
As you draw in on retirement though, it may be time to double down on spending and savings habits. For example, for empty-nesters, it may make financial sense to downsize a home a few years before entering retirement to provide a cushion of additional assets. Relocating to a cheaper housing market—in some instances—can potentially unlock assets in home equity, further aiding in retirement readiness.
At this life stage, keep a close eye on what, monetarily, is coming in and flowing out, and make the necessary changes to ultimately funnel more to the savings bucket, as it can really make a difference.
Make small yet meaningful increases
Vanguard’s annual How America Saves report recently highlighted that, in 2022, nearly a quarter of workers saved at least 10% of their income, and the average deferral rate remained at a historic high of 7.4%. Combined with an employer contribution, the total average contribution was 11.3%. Many Americans are on a solid track, but there is still work to do.
At Vanguard, we recommend that clients save 12-15% of their income toward retirement savings. Aim to increase 401(k) contributions by 1% each year, or make it a personal mandate to boost contributions every time a raise is received. While these minimal changes may not feel significant on the front end, the power of compounding will play a pivotal role over the long-term. When an individual is about a decade outside of retirement, they should aim to contribute the highest deferral rate possible. In 2023, the maximum contribution to a 401(k) is $22,500. If there are discretionary funds still available in the budget, one might consider, if applicable, opening and funding another retirement vehicle, such as a Traditional or Roth IRA, or a Health Savings Account (HSA), to further amplify investible retirement assets.
Consider catch-up contributions
Intended to help investors who are age 50 and older, catch-up contributions are offered in eligible retirement vehicles, such as IRAs, 401(k)s, SIMPLE IRAs, and SIMPLE 401(k)s. For those who need to make up for missed investment opportunities, and if the extra savings effort is within their budget, catch-up contributions can ultimately bolster savings efforts. In 2023, the standard annual IRA contribution limit is $6,500, however those age 50 and older can make a catch-up contribution of an additional $1,000.
Don’t let market volatility scare you
Quite simply, do not let emotions get the best of you and aim to never abandon a long-term retirement savings plan. Market volatility will always be present, but it’s incumbent on long-term investors to weather the storm.
This can be difficult to remember if the market is wreaking havoc on a portfolio as one nears retirement. For those within this 10-15 year window, this is where a trusted financial adviser can come into play as they can help to assess or re-evaluate one’s financial plan. Often, advisers are not only seen as financial coaches, but importantly, behavioral coaches as well, reminding investors to stay the course and stick to the designed plan that was built alongside their trusted guidance.
Lauren Wybar, CFP, is a senior financial adviser at Vanguard Personal Advisor.