Are you on track to meet your retirement goals? If not, now is the time to give your retirement account a little extra boost. Consider these 10 tips to increase your retirement savings and set you on track to a more comfortable retirement.
1. Start Early – If you don't already have a retirement account, April Lewis-Parks, Director of Education and Public Relations for Consolidated Credit, has excellent advice for you: "Start a retirement fund as soon as possible."
Lewis-Parks suggests using online calculators to run scenarios of how different contribution levels add up over time, adding, "Once people are aware of how little changes have a huge impact, then they will start to make those changes." See for yourself how compounding can be your friend.
2. Use Catch-Up Contributions – Contributions to your 401(k) plan are limited to $18,000 in 2017, unless you happen to be age 50 or above. In that case, you can contribute up to an extra $6,000 as a "catch-up" contribution. Catch-up contributions allow late starters to contribute a greater share of their income — although you can never fully catch up from a late start.
3. Scale Your Contribution To Your Income – Instead of setting a dollar value to contribute to your income, choose to contribute a percentage of your income. You won't have to remember to increase your contribution as your income rises, and will not be tempted to use that portion of your raise for things other than your retirement. Of course, if you can reach the maximum contribution for the year, that's even better.
4. Take Full Advantage of Employer Matching – From your perspective, employer-matching funds are free money. It's always a good idea to place as much money in your 401(k) as you can reasonably afford, but when matching funds are involved, the benefits are multiplied.
5. Include Your Bonuses – Avoid the temptation to spend your bonus. By directing it to your 401(k), you'll enjoy the fruits of that bonus when you retire and will be able to get greater value for your money when you need it the most.
6. Check Your Account – By "setting and forgetting" your account, you may have no idea of the returns you are getting and whether they are worth the fees that you pay. Look over your quarterly statements, and don't be afraid to make adjustments in your fund allocations. Research the options that your employer provides to make the most informed decision.
7. Manage Your Risk – As you adjust your investment portfolio, make sure that you maintain the proper risk balance to meet your needs. Typically, accounts should contain less risk as you get closer to retirement — but your response should depend on your risk tolerance and whether you are on track to meet your goals. If you are behind, you may have to consider riskier investments or scale back your retirement plans.
8. Avoid Cashing Out – When you lose your job, do not cash out your 401(k) unless you absolutely must have that money to survive until the next job. Leave it where it is until you are able to roll it over into a suitable IRA or a 401(k) with a new employer. Make sure that the transfer is directly from one account to the other and not through you personally, or it will be treated like a taxable lump sum payment to you.
9. Investigate a Roth 401(k) – Roth 401(k) plans are funded with post-tax dollars. Withdrawals of contributions are tax-free, and withdrawals of earnings are also tax-free as long as you have held the account for a minimum of five years and you are at least age 59-1/2 (or become disabled). This is a great choice for those expecting to be in a higher tax bracket at retirement, since you can pay your taxes up front when you are in a lower bracket.
10. Don't Borrow Against your 401(k) – It is possible to borrow money against a 401(k), but it is usually not a good idea. "If you're considering borrowing from your retirement savings to pay off debt – DON'T!" cautions Greg McBride, Chief Financial Analyst at Bankrate.com "Here's the problem with that: too often people rob their future self to pay for things that their past self did. That's backwards." Borrowing against a 401(k) comes with great risk if you lose your job during the payback period, and your repayment amount is essentially taxed twice because you are replacing pre-tax dollars with post-tax dollars. "You're losing tax efficiency," explains McBride. "You're repaying that 401(k) loan with after-tax dollars, and then when you retire and make withdrawals, guess what? You get to pay taxes on it again!"
Some consumers like to borrow against their 401(k) for the down payment on a house, but this is an indication that you are buying more home than you can afford. How will you pay back the loan and handle all the running expenses associated with homeownership?
Are you without a 401(k)? You can easily set up your own IRA with minimal funds. Options are available for $1,000 or less, and most of the principles above apply to an IRA as well.
It doesn't matter what type of retirement plan you have, as long as it meets your needs and you contribute to it on a regular basis. The one plan that is guaranteed not to work is ignoring your retirement accounts altogether.
Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.