Almost everyone hopes to retire one day, but many people aren’t sure how to get there. Earning enough money to retire is quite a daunting task, especially when you’re just starting out. But developing a plan and taking advantage of every savings opportunity can help alleviate stress and put you on the path to financial freedom in your golden years.
Here are seven tips to keep in mind when trying to maximize your retirement savings.
1. Start saving today
Getting started as soon as possible will have a major impact on your retirement savings over time. Because retirement is still decades away for many people, the money you save today will have more time to grow and be worth more during your retirement than the money you save later.
Even if you don’t have much to save right now, remember that starting small can still make a mark. If you start investing €75 per month at age 25, you will have more at age 65 than if you wait and start investing €100 per month at age 35. more years.
2. Contribute to your 401(k) or workplace retirement plan
If your employer offers a retirement plan like a 401(k), that can be a great place to start saving. In a traditional 401(k) plan, contributions are made with pre-tax dollars, meaning you don’t pay federal income taxes on those contributions. Once invested, your money may be deferred until you start withdrawing money during retirement.
Some employers also offer the option to participate in a Roth 401(k) plan, which requires you to make contributions with after-tax dollars. This may sound like a bad deal at first, but with a Roth plan, you won’t pay taxes at all on withdrawals during your retirement. This option makes sense for many workers, especially those with low current tax rates, who will likely fall into a higher bracket once they start withdrawing money.
Employees can contribute up to $22,500 to 401(k) plans in 2023, while employees over age 50 can contribute an additional $7,500 for a total of $30,000. The contribution limit will increase to $23,000 in 2024, or $30,500 for people over 50.
Investment options in workplace pension schemes may be somewhat limited, but be sure to pay close attention to the expense ratios for any funds you are considering. Index funds typically have low costs and give investors access to a diversified portfolio of securities.
3. Use your employer’s company match
Another bonus of workplace plans is the employer match. Many employers offer to match a portion of the employee’s contribution to their retirement plan and this benefit is something everyone should try to take advantage of. Experts consider the competition as ‘free money’.
Here’s how it works. An employer may offer to match 100 percent of your contributions up to a maximum of 3 percent of your salary, and 50 percent of your contributions by an additional 2 percent. For example, if you contributed 5 percent of your salary to the pension plan, your employer would contribute an additional 4 percent of your salary through the match. This means that 9 percent of your salary goes to retirement savings, even if you have only contributed 5 percent.
You always want to be sure that you contribute at least enough to receive the full amount of any employer match available to you.
4. Deal with your debts as quickly as possible
One thing that will really hold you back in saving for retirement and building wealth in general is debt.
Focus on paying off expensive debt first, such as credit card balances and student loans. These types of loans can come with interest rates in the high teens, which are much higher than what you are likely to earn on your investments. If your debt balance increases at those high rates, the best investment you can make is paying off the balance as quickly as possible.
If possible, try to pay off any mortgages before you reach retirement age. It will make living on a fixed income much easier.
5. Open an IRA
An individual retirement account (IRA) can also be a great way to boost your retirement savings. IRAs offer many more investment options than the limited choices in a 401(k) plan. You can choose from individual stocks, bonds, ETFs, mutual funds and more. Contributions are limited to $6,500 in 2023, or $7,500 if you are 50 or older. Those limits will increase to $7,000 and $8,000 respectively in 2024.
With a traditional IRA, you may qualify for a tax deduction in the year you contribute, but you will pay taxes when you start making withdrawals during retirement. Withdrawals before age 59½ will be subject to taxes and a possible 10 percent penalty. Once you reach the age of 73, you should start withdrawing money.
Another option would be to open a Roth IRA, which has many of the same features as a traditional IRA but also has a great tax advantage. Contributions to Roth IRAs are made with after-tax dollars, which means you get no tax benefit up front, but you won’t have to pay taxes on withdrawals during retirement. There are also no requirements to make withdrawals from a Roth IRA, so you can let the money grow longer and pass it on to your heirs or donate it to a charitable organization.
6. Budget expenditure
Small amounts of money can add up over time if invested wisely. So understanding how you spend your money today can help you develop a retirement savings plan.
It can be helpful to create a monthly budget and record everything you spend money on. Typically, there are habits or patterns that emerge during a budgeting exercise that can be eliminated to help you boost your savings. Maybe there are auto-renewing subscriptions you forgot about, or too much spending on eating out. Keep in mind that saving a little more each month can really add up over time.
7. Plan your health insurance strategy
Many people neglect to plan for healthcare costs during retirement because they are covered by their employer’s plan while at work. But health care costs in retirement can be significant, and some studies suggest you should set aside hundreds of thousands of dollars for it in your later years.
A convenient way to save for these costs is through a health savings account (HSA). HSAs work similarly to retirement accounts, but the money can be withdrawn tax-free at any time to pay for qualified medical expenses. Offered as part of high-deductible health insurance plans, HSAs offer the triple tax benefit of tax-deductible contributions, tax-free withdrawals for medical expenses, and tax-deferred growth on your investments.
Additionally, HSAs can act as an additional retirement account because once you reach age 65, the money can be withdrawn for any reason. You only have to pay taxes on withdrawals for non-medical purposes.
In short
Saving enough money for retirement can seem like a daunting task, but if you develop a plan and stick to it, it’s an achievable goal. Do what you can to start saving and investing today, because even small amounts can add up over decades. Make sure you take advantage of your employer’s retirement plan options and contribute enough money to receive the full employer match.
Pay off high debt as quickly as possible and monitor your expenses closely to prevent bad habits from eroding your ability to save. If you’re looking for ways to save for medical expenses during retirement, HSAs offer a triple tax benefit and can serve as an additional retirement account.
