How To Win at Retirement Savings
Retirement savings isn’t a game, but it’s definitely a strategy at which you can win. But it will take proactive steps on your part if you want to end up with a comfortable retirement at the end. Here are some of the best strategies to ensure that you end up on top when it counts the most — after you retire.
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Start as Early as You Can
The best way to boost your retirement savings is to start as early as possible. Not only does this give you more time to sock away money, but it allows compound interest to work its magic. The earlier you can start saving, the easier it will be to reach your retirement savings goals. Of course, early in your life is the hardest time to save, as your income is likely the lowest that it will ever be. But a look at the math should be enough to motivate you to start as soon as possible.
If you want to reach a $1 million retirement nest egg by age 65 and you start when you’re 35, you’ll need to save about $671 per month, assuming an 8% return on your investments. But if you start at age 20 instead, you’ll only need to invest about $190 per month. That’s an incredible difference, and it eases your monthly burden over the long run by a dramatic amount. Looking at it another way, if you start saving that same $671 per month at age 20 instead of 35, you’ll end up with closer to $3.5 million.
Pay Yourself First
A key strategy to winning at retirement savings is to “pay yourself first.” This means that you should set aside your investment contributions before you pay other obligations, even your bills. If you can learn to live off what you earn after your savings, you’ll master the art of saving for retirement. Working the other way around — in which you contribute what’s left at the end of the month instead — typically ends up with a contribution amount of zero.
Automate Your Savings
It can be hard to diligently stick to a long-term savings and investment plan. Human nature makes it easy to divert money from retirement savings to everything from regular bills and emergencies to discretionary spending like eating out or going to a concert. The best way to circumvent this tendency is to automate your investment contributions. When money comes out of your bank account automatically every month, you won’t ever forget to make contributions, and the money will be out of your account before you can spend it.
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Avoid Being Too Conservative
Some investors view their retirement savings as conservative investments that they don’t want to lose. While no one wants to blow up their retirement account, investing too conservatively can be equally problematic. If you start saving at age 20 or even 35 or later, you’ll still likely have 30 or more years until you retire, which means your money has time to recover from downfalls. Over that long of a time period, it pays to invest in higher-growth options like stocks instead of low-paying choices like CDs or Treasury bills, which can actually have a negative return after factoring in inflation.
Maximize Your Employer Match
If you work for a company that offers a 401(k) plan, your employer will likely match at least a portion of your contribution. For example, your company might match 100% of the first 5% of your income that you contribute to the plan. This is the closest you will likely ever come to getting free money, and those annual contributions can really boost your long-term retirement value. This is one of the best ways to maximize your retirement savings.
Choose Tax-Advantaged Accounts
If you can get a tax deduction on your retirement savings contributions — as you can with a 401(k) plan or a traditional IRA — or if you can make tax-free withdrawals from your account in retirement — as you can with a Roth IRA — you can get ahead of the retirement savings game. Any dollars that you can save for retirement instead of handing over to the tax man will help build your long-term nest egg.
Minimize Fees
Fees are nothing but a drag on your investment results. In this era of no-load mutual funds, zero-commission trading and fee-free accounts, there’s no reason to be paying more in advisor or management fees than absolutely necessary. Every dollar that goes out of your pocket to pay for services is another dollar that’s not going toward your retirement nest egg.
Maximize Your Income
One of the best ways to boost your retirement savings is to increase your income. This is easier said than done, obviously, but it’s just simple math. If you’re trying to sock away $500 per month to put toward your retirement, for example, that’s a lot easier if you are earning $5,000 per month instead of $2,000 per month. Always be on the lookout for ways that you can step up your income, through promotions, side gigs or even a new job entirely.
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This article originally appeared on GOBankingRates.com: How To Win at Retirement Savings
