The Best Way to Catch Up on Retirement Savings

By Justin Pritchard, CFP®

Your retirement savings are crucial, as those funds can supplement income from Social Security or a pension.

So, what’s the most effective way to build up the savings that will support you when you stop working? This is important for everybody, but I most often run into this with people who feel like they’re behind and they want to catch up.

Also, what other strategies can help you get and stay on track?

It’s interesting to look at what has the biggest impact on your retirement success, and the answers might surprise you. So, we’ll look at the topic from a few different angles, and we’ll do a deep dive on the age-old question of whether it’s best to save more or invest more aggressively.

Key Takeaways:

  • With investments, you can earn more in the markets or save more each year (or both).
  • When time is limited, additional savings may be most effective.
  • High investment returns can help, but possibly less than you think—and there’s a risk.
  • Additional strategies can help you get on track.

Continue reading below, or get similar information from this video.

Most people think about their investments when they’re trying to catch up on retirement savings. There are essentially two ways to build up your account balances:

  1. Add money to your accounts
  2. Grow money that you already have

For some, there’s plenty of cash flow available to add to accounts, and they can shovel money into tax-favored savings vehicles. Combined with plenty of time and compounding, that can turn out well. Others might have less time, but they have assets saved, and it’s a matter of managing their savings.

Behind the Curve?

I occasionally meet with people who say that they’re behind on their retirement savings goals. That’s often because they started saving at a later age, or maybe they hit some speed bumps in life and they’re getting back on track.

Regardless of the cause, they might say, “I need to really be aggressive so I can catch up and grow my assets.”

When I ask what they mean by aggressive—maybe they’re talking about saving a large portion of their income, for example—they almost always say they want to earn as much as possible in the markets. The idea is that you can grow your way into financial security by picking the right investments.

That philosophy makes me slightly uncomfortable, but sometimes it’s the right approach.

So, what matters most when you’re trying to build up assets—especially when you have limited time?

You do need some time. If you’re retiring next month or next year, you pretty much have what you have. There’s not much to do besides manage those assets wisely. Investing still matters because, hopefully, you’ll be retired for several decades, and we want that money to last. And investment mishaps are especially painful later in life.

For those who are still in their working years, it’s interesting to look at how you might build up assets.

Save More or Invest Aggressively?

Let’s start with an example where you save $10,000 a year and earn 6% on your investments. Of course, your numbers might be different, so you can get your own numbers with the calculator below.

You increase your contributions each year with inflation, and you have 10, 20, or 30 years to go until retirement.

Now, assume you have a magic wand, and you can double the amount you save or double your investment return—or both.

For now, we’re assuming you’re starting with zero. Or, we’re only looking at what happens with future contributions.

Let’s see what happens when you change the numbers. We’ll start with saving $20,000 per year, or double your current savings.

That’s easier said than done, and I want to acknowledge that people have very real challenges coming up with extra money. You’re not a bad person if you’re not saving more. You just need to figure out how to navigate your reality—whatever that happens to be. We’ll talk more about that later.

Chart showing various outcomes based on saving more and/or investing more aggressively

So you double your savings, and you double the results. That’s great.

Now, let’s assume you could double your investment return by taking more risk.

This is tricky. By taking more risk, you don’t automatically increase your returns, and we can’t ignore downside risk as we pursue the potential benefits of risk. You might expect higher returns over the long-term, but the fact is you might experience bigger losses. You might not ever be able to recover from those losses, so this is a risky approach.

For example, we can look at historical market crashes and see what different investors might have experienced. Switching from a lower-risk portfolio to a higher-risk strategy certainly makes a difference. We’ll just assume that you go from a portfolio of 50% stocks and 50% bonds to a 100% stock portfolio.

Note that a 100% stock portfolio might not even produce the types of results we’re playing with today. You didn’t necessarily double your returns by doubling your stock exposure—at least when we use long-term historical data. According to Vanguard analysis, the increase was roughly 2% per year.

During the Great Financial Crisis (12/31/2007 to 3/31/2009):

  • A 50/50 portfolio might have lost roughly 22%
  • A 100% stock portfolio might have lost roughly 44%

During the dot-com crash (3/31/2000 to 9/30/2002):

  • A 50/50 portfolio might have lost roughly 13%
  • A 100% stock portfolio might have lost roughly 43%

Granted, during strong markets, the effect is much better. But you don’t know what you’re going to get.

Back to the numbers, it turns out that it’s hard to invest your way out of a savings challenge.

Note that a 12% return is a relatively high number. I’m generally not comfortable using a number that high when I do retirement projections for clients. But my crystal ball is broken, and anything is possible.

Many of you don’t have 30 years until retirement. Still, you might gravitate to the idea that taking more risk is the best way to catch up on your retirement goals. And it’s true that bigger investment returns can potentially produce dramatic results, especially over the long term.

So, investing with more risk might make sense to those who have a lot of time. It can also make sense if you’re currently taking less risk than you could. For example, keeping 100% of your assets in cash for a 30-year retirement can potentially expose you to inflation risk. You might lose purchasing power, even though you’re unlikely to lose money.

When you don’t have the luxury of time, taking more risk is especially… risky.

That’s particularly true when you already have assets and you’re wondering about dialing up the risk on your existing nest egg.

You might think I’m saying that it’s bad to add risk. That’s not the case. It might or might not make sense to increase risk with the hope of higher returns. However, you need to be careful about the rationale for doing so and the expectations, especially over short timeframes.

Your Existing Nest Egg

I like to walk through optimistic and pessimistic scenarios with clients to help them evaluate the decision.

Let’s say that you have $400,000 in an IRA. If you could double your money in the next few years, you’d have $800,000, which might be all you need to supplement your Social Security and other resources.

If that’s how things unfold, that’s great, and that’s exactly how I would want it to work out for you.

But the reality is that you might lose a substantial amount. Let’s say the value drops to $250,000, which is not unrealistic for a portfolio with heavy exposure to stocks. You could even lose more. $250,000 is still more than a lot of people have, but it doesn’t look so great compared to the $400,000 you used to have.

In this example, you might have had a workable situation, but things got substantially more difficult. The amount of income you can take is roughly half, and every withdrawal takes a bigger chunk out of your assets.

Let’s look at a less extreme example. Assume you have $1 million, and you’d like to have substantially more in 4 to 5 years.

If we go back to the example of saving an additional $10,000 per year (over what you’re currently saving), that doesn’t make a huge dent in your existing balance of $1 million. You’d add $50,000 plus any growth.

Viewed another way, it’s roughly the equivalent of earning an extra 1% return. It would certainly help, but it might not be as dramatic as you were hoping for. As a result, you might explore adding risk.

Again, let’s imagine some optimistic and pessimistic scenarios.

Assume you can earn an extra 3% per year by taking on more risk, and we’ll ignore future contributions. Again, remember that the historical long-term effect of going from a 50/50 portfolio to 100% stock was roughly 2% per year.

After five years, your $1 million nest egg might grow (assuming flat-line growth, which is unrealistic) as follows:

  • With a 6% return, you would have $1,338,225
  • With a 9% return, you would have $1,538,623

That’s a difference of roughly $200,000.

While rules of thumb are highly problematic, the so-called 4% rule can provide a quick estimate of the impact. For instance, what’s the difference in your income with an extra $200,000 in assets at retirement? You might expect to pay yourself an extra $8,000 per year or $667 per month. Not too shabby.

But what if things don’t go your way?

The additional risk required for the 9% return might mean that market crashes are more severe by 20%, 30%, or more. Without getting into complicated math, the result could be living with $8,000 per year less than you would have been able to pay yourself. The actual difference is probably bigger than that, so you’d really have to play catch up.

Of course, if you can ride out the downturns (and you’re fortunate enough to have the market recover when you need it to), things might work reasonably well. But you might not benefit by much—if you come out ahead at all—and the ride could be stressful.

These are all factors to consider: What’s the potential benefit, what are the risks, and what will you do if things go sideways? Also, how well are you going to sleep at night?

This all illustrates how hard it is to just flip a switch to improve things. I want to acknowledge that people live with various challenges, including financial hurdles, and I wish there were an easy way to just improve your chances.

How to Play Catch-Up

In Your 30s

At that stage, you typically have several decades to save. Plus, you have the benefit of time, allowing you to invest more aggressively. By pursuing long-term growth, you can let compounding work in your favor. However, you need to be willing and able to ride out market downturns, which can be scary.

In Your 40s

Catching up on retirement savings is easiest in your 40s or earlier. At this stage in life, you may be earning more, which hopefully provides cash flow for monthly savings. You still have some time to invest in a stock-heavy portfolio, and you might have enough investing experience to remain calm during market turmoil.

This is a time in life to take advantage of employer retirement plans and minimize debt so it’s easier to save for retirement.

In Your 50s

Take advantage of catch-up contributions, which allow you to save more each year in tax-favored retirement accounts. IRAs and workplace plans like 401(k) and 403(b) plans allow those over age 50 to contribute above and beyond the standard maximum contribution limit.

You’re typically in your peak earning years at this point. Plus, if you had children, they may be increasingly independent, which could free up cash flow for retirement savings.

It’s also time to get strategic about investment risk. You still have time to pursue some growth, but market crashes just before retirement can be problematic.

50s and Beyond

Some of the first ideas that come to mind for improving things include:

  • Downsizing or relocating can bring significant savings. Lower housing costs (not to mention getting cash from a home sale, if that’s in the cards) can make things easier.
  • If you can’t do anything differently now, explore changes that you can make in the future. Could you relocate after you stop working, for example?
  • Consider part-time work, consulting, or other income sources. Yes, it’s probably not your first choice, and it’s not “retirement.” But it’s an effective way to change your working reality sooner rather than later. Plus, it’s a powerful strategy for your finances. You might not need to earn nearly as much as you’re earning today to make an impact.

Important Information

You can and will lose money investing. Whether or not you will be able to recover from losses is uncertain. Past performance does not guarantee future results. We look to the past for examples, but only time will tell how things unfold. The mention/display of any financial firm is not a recommendation for or against using their products. Other firms are not affiliated with Approach Financial, Inc. Any rates of return shown are for educational and illustrative purposes only, and do not indicate that the firm can deliver such results for clients. Investor returns vary based on risk levels, economic and market activity, investment selection, fees and expenses, timing, and other factors.