How Do We Play Retirement 'catch-up?'

Question: Danny and Laura in Kenton County: We are both in our mid-50s and both kids are finally out of the house. We haven’t been great at saving since we tried to give the kids as much financial support that they needed. But now that they’re on their own, we want to make retirement a priority. What are your suggestions for us for how to do that?

A: Sacrificing your financial security for your children definitely isn’t unheard of. And while it’s not something we recommend doing, considering we’re both parents ourselves, we know that’s easier said than done. Should you have been saving more over the last 18+ years? Yes. But that’s water under the bridge now. You can’t change the past. As you mention, you’re ready to refocus – and reprioritize. And for us, that’s all that matters.

You should definitely start funneling as much money as you can into your retirement accounts, such as any 401(k)s, Roth 401(k)s, IRAs, and Roth IRAs. And if you reach the regular, annual contribution limit? Good news – the IRS actually allows anyone age 50 or older to make “catch-up” contributions every year. For 2022, that means an extra $1,000 can go into an IRA (or Roth IRA) and an extra $6,500 into a 401(k) (or Roth 401(k)).

Additionally, you could consider saving in a Health Savings Account (HSA) which provides triple tax advantages for healthcare costs – especially if your employer matches any contributions. However, it’s a trade-off; you would have higher out-of-pocket medical expenses in the short-term, but you would have a pool of money to use for retirement healthcare bills (plus, an HSA essentially becomes a de facto 401(k) at age 65).

And don’t forget about your debts. If you have high-interest rate credit card debt, pay that down as soon as possible. This will help free up money for other financial priorities, such as also paying down your mortgage. Because if you can swing it, entering retirement mortgage-free will not only be a great burden off of your retirement budget – but it might help you sleep better at night as well.

Here’s the Allworth Advice: Since you’re playing catch up, you might need to work longer than you were planning. But then again, maybe not. The best way to figure out where you stand right now and how to reach your retirement goals is to work with a fiduciary financial advisor. He or she can run the numbers, create a plan, and help you determine your best strategy moving forward. We just encourage you actually stick to that plan. Because researchers at the Center for Retirement Research at Boston College recently found that while empty-nesters have the best of intentions, many actually don’t end up making up for lost time. Make sure you buck that trend.

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Q: Peter in Morrow: What do I need to know about mutual fund expense ratios?

A: An expense ratio is an annual fee – charged to you by the mutual fund company – that goes toward the costs of running the fund. These costs are above and beyond any sales charge you may have paid purchasing the fund and they’re disclosed as a percentage of your investment. For example, a one % expense ratio means you’ll be charged $10 for every $1,000 you invest. And while you won’t see that money removed from your account since it’s an ‘internal’ expense, rest assured, you’re paying it. Moreover, keep in mind that ‘actively-managed’ funds that use a professional manager and team of researchers generally have higher expense ratios than ‘passive’ funds (like index funds and exchange-traded funds) that track an index.

While we think the expense ratio is a very important consideration in choosing a fund, be careful about getting too caught up in trying to pay the absolute least amount possible. Instead, the Allworth Advice is to make sure that the funds you buy are giving you the performance you expect after any internal expense and are appropriate for your financial goals and in-line with your overall financial plan.

Every week, Allworth Financial’s Amy Wagner and Steve Sprovach answer your questions. If you, a friend, or someone in your family has a money issue or problem, feel free to send those questions to [email protected]

Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney . Retirement planning services offered through Allworth Financial a SEC Registered Investment Advisor. Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Visit allworthfinancial.com/?c3=allworth-advice or call (513) 469-7500.