Our content may include links to products from our partners
The Smart Investor content is intended to be used and must be used for informational purposes only. We are not an investment advisor and you should NOT rely on this information to make investment decisions.
There are three primary considerations of why people should seriously find ways of boosting their retirement savings now. On top of them is there is a single fact – people are going to live longer. In addition to that – the stock market will continue to behave like a roller coaster, and let’s not forget that there will be more job losses. Yes, it is difficult – but by following even the simple tactics here can go a long way to increase your bottom line retirement.
1. Contribute to Your 401(k)
If your company has a traditional 401(k) plan, you have an advantage. This is because it allows you to contribute pre-tax money.
For example, assume you are in the 15% tax bracket and plan to contribute $100 per pay period. Since your contribution will come out of your pay before they assess the tax, your take-home pay will drop only by $85. So, less deduction means more money to invest without straining the family budget.
It’s different if your employer offers a Roth 401(k) because it uses income after taxes. You should carefully consider what your income tax bracket would be upon retirement so see if this is right for you. Even if you leave the company, you have to learn the choices on what to do with your Roth 401(k).
2. Make One-Time Payments on Annual Expenses
You know that there are big annual expenses that you can pay all at once or over a period of months. Most companies will offer a discount if you opt to pay it all in one payment. The strategy is to break down the required amount into smaller chunks and save the money every month. It would help if you put them in a special account. So, when the time to pay for these expenses come, you’ll have enough money saved up for them.
Let’s take the case of your car insurance premiums. If you have to pay $1,000 per year on premiums, you can set aside $84 every month in the special account. Better yet, save it on an Internet account because it will give you higher interest than a traditional bank account.
When the insurance due date comes, you just take the money from the special account, transfer it to your checking account and pay the bill. If there’s anything left, add that to your family budget or use it as initial savings for next year’s premium.
Many insurance companies would gladly take off 10% or more if you pay your premium annually. Some will even give promotional discounts if you agree to an automatic payment arrangement with them. Think about it: if you save $250 per year using this method, that’s a big saving. In 30 years (using a 7% rate of return), you would have an extra $18,251 stocked up in your retirement account.
3. Open an IRA
Go for Traditional IRA depending on your income and whether you and your spouse have a workplace retirement plan. Your contributions to a Traditional IRA may even be tax deductible. Your investment earnings also have the opportunity to grow tax-deferred – until you make a withdrawal during your retirement.
However, if you meet the income requirement, a Roth IRA might be the one for you. You fund them with after-tax contributions and if you’ve met the conditions, there are benefits. Once you’ve held the account for five years and you’ve turned 59 ½, qualified withdrawals (and earnings) are free from federal taxes. In some cases, they can even be free from state taxes.
4. Set up an Automatic Investment Plan
You may easily afford to put money into your IRA but you may not really like the idea of writing a large check before the tax deadline. An alternative is to establish an automatic monthly or quarterly contribution. An automatic contribution to your IRA takes the burden of paying for your retirement plan out of your hands. It helps ensure that you “pay yourself first.”
You can just program to transfer funds regularly from any of your checking, savings or money market account from any bank. You can also do this from your account at any savings and loan, credit union or brokerage account. Any amount you invest in your retirement is good although the maximum amount possible will help you reach your goal faster. If you cannot afford the maximum monthly or quarterly amount, you can kick off with a smaller amount. Then, you can gradually increase the amount until you reach the annual contribution limit.
Long Time To Grow
Another advantage of an automatic contribution is that your savings will have more time to potentially grow. For example, let’s say you contribute $400/month to an IRA starting in May and do so for the next 11 months. Your contributions will begin to compound earlier than those remitted right after the tax-filing deadline.
By investing a regular amount each month or quarter, you will effectively be using a strategy called dollar cost averaging. This spreads out your purchases over time and you lessen your risk of making a large investment at the wrong time. Technically, you buy more shares when the prices are low and less when they are high. While there is no guarantee you will earn when you sell, the method reduces your risks and builds investing discipline.
5. Reduce Expenses
“It’s not how much you make, it’s how much you keep that matters.”
It actually makes a lot of sense. Even if you make $2 million and spend a dollar more than that, you technically end up in the negative. It would be a good practice to watch your expenses. It is a very simple and practical step but it’s unbelievable how many people spend more than what they make. In the course of time, this can lead to debt and even debt that can spiral out of control.
You’ll probably have to read the fine prints of your prospectus to find exactly how much you’ll be paying in fees. The effort is worth the potential savings you can get. For example, if you have $10,000 in a mutual fund that charges 3% in fees, that’s $300 per year. If the fund gives you a 7% return per year, you’d have paid $4,435 in base fees after 10 years. That does not include the lost returns on that money.
If your credit card charges an annual fee, consider switching to one that has no annual fee. If you are really loyal to your card, try asking customer service to waive your fee for the year. Most credit card companies are willing to do this for their long-time customers. Saving just $200 per year and channeling that to your retirement savings for the next 30 years, at 7% return, will give you $14,601.
Here are some other things you can do to reduce your expenses. Pay off high-interest debts first. If you can’t pay – consider debt consolidation. There are great ways to do it. Evaluate your housing expenses – you may find other options that can give you lower monthly payments. Rationalize your household spending and ask if you are paying for a need or a want (ex. premium cable TV subscription).
6. Consider Relocating or Downsizing
If you live in an area with a high cost of living, consider moving to a less expensive area. You can add to your retirement account whatever saving you can get from the relocation. You’ll be surprised at the huge difference it would make to your funds.
If you are already an empty nester still living in a house for a family of six, and your house has appreciated in value, why not sell it?
It would be more practical to live in a smaller house. You’ll save on your mortgage payments. And you’ll save on the costs associated with maintaining a big house like heating, cooling, insurance, home maintenance, and property taxes. From the money you make on the sale, you can dump some of them on the retirement account and set aside a little for you to enjoy now.
7. Start a Side Business
One of the best strategies for financial security upon retirement is to create your own source of income. Of course, each person’s situation is unique and you don’t want to jeopardize your full-time job. A good start would be to do consulting work or put up a business that relates to your passion in your 60s. Surprisingly, it is easier to start a business in your 40s to 50s than after you retire. Yes, it may be true that you would already have a big network of friends and business contacts.
However, there might be some resistance from people to take you seriously as a professional when you retire. That’s a reality. Second, there is a tendency to use your savings as additional capital for the business. People make the mistake of thinking they can easily get back from the business what they sink in.
Finally, as many have experienced (myself included), building a successful business takes time. If you start your business just before you retire, you should be running one comfortably just when you need to.