You have a lot to think about when it comes to your finances, and one of the things on your mind might be your retirement savings plan. From figuring out how much you need to live comfortably, to figuring out how to limit costly investment fees, taxes, and penalties, there is a lot to consider.
If you want to save more for retirement, you need to have a plan. Yet 36% of American workers don’t have a retirement strategy. Are you one of them? Rather than letting retirement woes add to your already full plate, here are seven ways to start save for retirement to help you worry just a little less.
#1 – Set a retirement goal
A great way to save more for retirement is to start with a goal in mind. Many Americans would say they’d like to retire as a millionaire, but is it realistic or even necessary?
An important question to ask yourself is, “how much money do I need to retire?” The answer to this question will help shape your retirement goals. You can start by using a retirement calculator or by asking a financial advisor or other trusted financial expert. A few data points you’ll want to have ready include:
- Your current age
- Age that you want to retire
- Annual household income (including from savings or investments)
- How much you currently contribute towards retirement
- Current retirement savings
You can play around with the numbers by adjusting your retirement age or the amount of money you’re able to contribute to your retirement each month. Then, start working towards the ideal contribution amount. If it feels overwhelming or out of reach, make it incremental. For example, if your goal is to save $1,000 per month towards retirement, but that amount doesn’t fit the budget, start smaller. Even $100 per month for the first year is a great start, and you can add to that amount over time.
#2 – Reduce debt
A strategy often overlooked when it comes to planning for retirement is to focus on your debt. By concentrating on debt reduction, you could free up money that can be added to your investments or savings. Imagine how quickly your nest egg could grow if you could take money previously allocated towards interest on a debt and put it towards your future.
There are several ways you can reduce debt. You can start with a focus on strategies that give you quick wins so you can maximize your retirement contributions, especially if you are closer to your retirement age goal. A few strategies include:
- Debt snowball or debt avalanche method
- Debt consolidation
- Refinance existing loans
- Credit counseling
- Debt relief (also called debt settlement)
#3 – Contribute to a 401(k)
A 401(k) is a common retirement account that many Americans have. These are employer-sponsored retirement accounts in which you can contribute pre-tax dollars towards your retirement.
While these plans are an effective way to save for your golden years, you should pay attention to how this account is being invested. If you are closer to retirement age, for example, you may want to avoid riskier investments. At any age, however, it’s a good idea to contribute up to the employer match if it’s available. If your employer has a matching 401(k) program it means they will contribute a percentage of your contribution, up to a set portion of your total salary. Here are a few other guidelines to consider at each age.
In your 20s
Just starting out with your career? At this stage of your retirement planning, you have an advantage because time is on your side. Even if you feel like you don’t make a ton of money right now, adding a percentage of your income towards retirement is your best bet. You also have the advantage of investing in more aggressive funds which can mean high risk, high reward.
You are most likely in the prime of your career and making a larger income. Continue to increase your 401(k) contributions as your income increases. As you make larger 401(k) pre-tax contributions, your taxable income goes down, which may mean more money for both the future and present you.
By now you might have little ones to consider and perhaps you are adjusting your retirement strategy. It’s wise to sit down with a financial expert to go over your investing strategy and when you would like to retire. Discuss if you should transition from a more aggressive investing approach to a conservative approach to protect all those years of saving and factor in other large expenditures such as a bigger home or paying for college education(s).
This is an exciting stage of your retirement journey and perhaps the most important. While retirement may be just around the corner, there are two key factors you want to consider. First, don’t overlook required minimum distributions (RMDs). RMDs means that you will have to take mandatory withdrawals from your taxable retirement accounts when you reach age 70 ½. Depending on how large your RMD is, you could be pushed into a higher tax bracket which means you’ll pay more in taxes.
The second factor to consider is delaying Social Security payments. You can collect Social Security benefits as early as age 62, however, your benefit check amount will be lower than if you delay your withdrawals. You can delay your payment up until age 70 and the longer you delay, the bigger the checks.
#4 – Open an IRA
In addition to contributing towards a 401(k), you can open an individual retirement account (IRA). IRAs offer tax advantages for retirement savings. The two you’ll want to look into are the traditional IRA and the Roth IRA. Here is a quick rundown of how they work:
A traditional IRA operates much like a 401(k). The money that goes into your account grows tax-deferred. Then when you are ready to withdraw from the account during retirement, you will be taxed at your current income tax rate.
Unlike a traditional IRA, Roth IRAs tax your contributions upfront. Any earnings in a Roth IRA grow tax-free and withdrawals are not subject to tax. You can also avoid RMDs with a Roth IRA, allowing you to hold onto the money in this account as long as you wish without penalty.
#5 – Reduce fees
By now you know that it’s important to set up your retirement savings and diversify it among different investing accounts. However, one mistake many people make is not taking the time to research the fees associated with the various types of retirement accounts.
Before you sign up for a new retirement account, ask about the types of fees involved. Hefty fees could drastically impact your nest egg amount if you don’t take the time to understand them. The more fees you pay, the less your money actually goes towards your retirement. Here are a few things to look for:
- Annual account management fees
- Expense ratios
- Commission fees
- Transaction fees
One of the best ways to save for retirement is by looking up the fees involved with your existing retirement accounts. Usually the fees can be found in your latest account statement. Then you can make an informed decision about your retirement accounts and move money if needed.
#6 – Consider a Health Savings Account
A Health Savings Account (HSA) is a tax-advantaged savings account to help pay for qualified medical expenses. But how does this help you save more for retirement? There are three major benefits to having an HSA:
- Contributions are tax deductible
- You can invest the money tax free
- Withdrawals are tax-free when used for qualified medical expenses
Many employers now offer health insurance plans with an HSA and may even contribute to your account much like they would with a 401(k).
The good news is when you retire, the account goes with you. That means that as you get older and potentially incur more medical expenses, you can use this account to pay bills without tapping into another retirement account. Even better news? Once you hit age 65, your HSA turns into a retirement account so you can use the money for anything — though you’ll be subject to taxes on any withdrawals at that point.
#7 – Automate savings
If you want to simplify your retirement savings, the easiest way to start is by automating your savings. Many retirement apps and platforms offer automatic investing options that connect with your bank account so you don’t ever have to think about it.
If you decide to invest outside of a 401(k), your retirement savings will most likely come from your monthly budget. Consider what amount you want to set aside each month towards retirement from your budget. Even if it’s a small amount, include it as part of your monthly expenses and then automate it. Your savings will have the chance to grow consistently, without any further stress on your part.
Your ‘future you’ wants to be debt free
When you think about your retirement future, it probably doesn’t include more debt payments. A more secure retirement starts by addressing important financial issues today, including your debt. Our free guide, How to Manage Debt, walks you through your options to get your debt under control so you can shape a better financial future for you and for future generations of your family.
- How Will Coronavirus Impact My Retirement Savings? (Freedom Debt Relief)
- 5 Smart Steps to a Debt-Free Retirement (Freedom Debt Relief)
- How to Win at Retirement Savings (New York Times)
- Tomorrow’s Sources of Income in Today’s Interest Rate Environment (Forbes)