Saving for retirement is, without a doubt, one of the wisest financial strategies you could follow, whether you are in your mid-20s or early 50s. The truth is that the earlier you start putting money aside and investing for your later years, the better off you will be. We have to thank compound interest for that. We will talk more about it later on. However, it is never too late.
Here are some handy tips to help increase your retirement savings and be able to put more money in your account, no matter what your current stage of life is.
Start Saving Today
According to various surveys, one of the top regrets of retirees is that they started saving either too little or too late. So, if you have yet to begin or are just beginning to save money for retirement, try to maximize your contributions so that you can benefit from compound interest. In short, compound interest is the ability of your assets to generate earnings for you; earnings that will generate their own earnings, with each passing year.
Suppose you take out a loan. The interest rate is calculated for the first year or month (“first period”), depending on the case, and is then added to the original total. The interest for the next period is calculated based on the gross figure from the first one. And so on. So, it is like you are reinvesting your assets every year and they give more earnings for you in return.
Financial experts recommend we keep aside, at least, 15% of our salary for retirement. One of the easiest ways to get there is by raising the amount you save by a couple of percentage points at a time. You can do that either by yourself (set a reminder on your smartphone or calendar) or through the auto-increase feature of your workplace retirement plan (if yours has it).
Contribute to Your 401(k) or Meet Your Employer’s Match
A 401(k) plan is a type of retirement account that comes with significant tax advantages and is a great and easy way to compound money over time. Stashing retirement savings in your 401(k) plan should be a priority because the money is automatically taken from your weekly or monthly paychecks before you get a chance to spend it (and before the taxes are assessed – meaning, you contribute to pre-tax money). So, for a $100 contribution per pay period, your take-home pay will reduce to $15, if you are in the 15% tax bracket. This allows you to invest more of your money but, most importantly, it also allows you to compound money.
Most companies offer traditional 401(k) plans. In some cases, they will also offer a company match or 401(k) match, which is basically extra money the employer contributes to your account. You can consider it, well, free money!
Suppose you earn $50,000 annually and your company offers to match 50% of your contributions up 5% of your salary. If you make a contribution of $2,500 to your retirement plan yearly, the company will kick in another $1,250. If your employer offers a company match, on top of a retirement plan, it is wise to contribute to the amount the company you work for kicks in.
Consider Other Options If Your Company Does not Offer 401(k)
If your company does not offer a 401(k), you have 3 options (1) Fund a traditional IRA (Individual Retirement Account), (2) Fund a Roth IRA or (3) Fund a myRA.
A traditional IRA is an account that you open and maintain, where you save money for retirement. Again, you contribute pre-tax money and get the chance to compound your money over time. No taxes are paid before the time you decide to withdraw the money (you are allowed to do so when you reach 59 ½ years of age). If you withdraw money before that, you will be subjected to penalty fees (10% of the money you withdraw) plus taxes. You can contribute up to $5,500 annually. For people older than 50 years of age, the max yearly contribution is around $6,500.
A Roth 401(k) will allow you to withdraw your contributions and earnings when you become 59½ years old (tax-free) – your contributions will be taxed the moment you make them. In other words, with a traditional IRA you are taxed on both contributions and earnings (every penny you contribute) while with a Roth 401(k) you are paying taxes on your contributions (savings) only. However, there is an income cap that needs to be met so you are allowed to make the max annual contribution of $5,500 (earn less than $117,000 if you are single or less than $184,000 if you are married). No income cap for people over 50 years of age. A penalty also applies for early withdrawals like with traditional IRA.
MyRA (My Retirement Account) is a relatively newly launched no-fee type of retirement savings plan where you contribute after-tax earnings. That money grows over time and you can withdraw it for emergencies (tax-free and without penalty) and, of course, for retirement. Nevertheless, the account is capped at $15,000 and there is an income cap too ($131,000 for single people and $193,000 for married individuals that file taxes jointly).
- It is suggested you consider contributing the maximum sum allowed in your IRA, 401(k) or other retirement plans.
- If you are older than 50, consider catch-up contributions to 401(k) or IRAs and take advantage of the fact that you are eligible to go beyond the normal limits as mentioned above.
- Stay diversified, because nobody knows exactly what the tax bracket will be in 20 years from now. So, if you are going back and forth regarding which retirement plan to go for (i.e. a 401(k) or Roth 401(k)), it is best to have flexibility and keep some of your retirement saving in a Roth account and some of it tax-deferred.
Do NOT Invest 100% in the Stock Market
Some people go into retirement with money invested in the stock market. This is the worst idea ever. Imagine the market plummets a day or week before you plan to retire. Or the market experiences a big crash after you retire. Instead, have 2 years’ worth of liquid savings. Having a cash cushion will allow you to keep your investments (and not sell them for breadcrumbs at the worst possible time) while also meet your expenses.
Experts advise you opt out of redirecting your retirement contributions into mutual funds and consider CDs, money market funds and other cash investment options to ramp down on equities and build cash at the same time.
Note: Whether you choose to have actively managed funds or passive funds tied to the stock market, always make sure you know the fees in your retirement account so you can decide if the return you get is satisfactory. Plus, even the smallest difference in fees can add up to 1000s of dollars over time.
Pay Down Debts
As a means to save for retirement and not be overwhelmed by all the effort involved, it is prudent to pay down your student debt or any other loan. According to findings of a study conducted by Aon Hewitt Corporation, 51% of workers (younger people, as well as 26% of Generation X, and 13% of baby boomers) with student debt hanging over their heads contribute a mere 5% of their salary to retirement plans/savings. Any kind of debt, be it credit card, student or any other, should best be paid down when you are about to enter your retirement years.
Other Key Considerations/ Added Tips:
- Automate your retirement contributions. This will help you grow your nest egg without feeling it too much on your monthly income.
- Have a budget and stick to it. Trying to reduce unnecessary spending to have more to save or invest is the idea here.
- Negotiate a lower rate wherever you can (i.e. on your car insurance) to increase the amount of money you can save for retirement.
- Set benchmarks along the way and have a clear vision of what you want to accomplish (and how much you will need) when trying to reach your retirement goal. There are calculators that can help you determine at what age you might be able to retire, as well as how much you probably need to save and invest to achieve that. There are even online calculators that can show you whether you are saving enough money to live the life you want in retirement.
- Don’t spend extra money that may come your way, such as a raise; just stash it (at least, half of it) and dedicate it to your retirement plan.
- Postpone receiving Social Security payment after age 62 and before you turn 70. It can help you boost the money you receive during retirement.
- Ensure family members are all filled in as account beneficiaries.
Bottom line, the question is how much to want to sock away for your retirement years and, of course, recognize the need to put money away for that purpose. Then, the road opens up for you and you will decidedly find plenty of ways to boost your contributions. Let us also not forget about the so-called fiduciary rule that will be fully implemented early next year, which requires brokers and advisers that work with individuals saving for retirement to put YOUR interest first. This means that they can no longer sell you an investment just because it is profitable; it needs to be the RIGHT one for your particular requirements, situation, and goals. An added plus for you!