Build wealth.
People who save enough money for a secure retirement often start saving at an early age and save consistently throughout their career. Super savers tend to max out their retirement accounts and take advantage of a 401(k) match and other types of employer contributions. It also helps to avoid taxes and fees whenever possible. Here are 10 strategies successful savers use.
Start saving at your first job.
Beginning to save for retirement in your 20s and 30s allows you to start generating valuable compound interest that will accumulate over decades. Tucking away even a small amount will get you into the habit of saving for the future. Take care to sign up for a 401(k) or other type of retirement savings account at your first job and save regularly. If you don’t have access to a 401(k) or want to do additional tax-deferred savings, you can open an IRA. Funding a Roth IRA can be especially beneficial for young people, who can take advantage of decades of growth and tax-free withdrawals in retirement.
Save with every paycheck.
Set up automatic contributions from your paycheck to a 401(k), IRA or taxable investment account, and learn to live on your remaining paycheck. Most contributions to 401(k)s and similar types of workplace retirement accounts are withheld directly from your paycheck, which makes it easy and painless to start accumulating funds for retirement. You can also set up direct deposits that will automatically contribute a part of each paycheck to an IRA, investment or savings account. If you make saving automatic, you won’t be tempted to spend those earnings or forget to make a contribution.
Boost your contributions.
Many people start out saving a modest amount, or are automatically enrolled in a 401(k) plan at a low savings rate. As your income grows, increase the amount you divert to your savings accounts. One simple strategy is to increase your savings rate by 1% each year or when you get a raise. It can also help to save a portion of windfalls such as bonuses or tax refunds. Some 401(k) plans offer automatic escalation, which will gradually increase your contribution amount over time. Remember to take advantage of catch-up contributions to 401(k)s and IRAs at age 50 and older.
Get your employer to contribute.
A 401(k) match or other retirement account contribution from your employer is likely to be the best possible return you can get on an investment. If your employer chips in 50 cents for each dollar you contribute, that’s a 50% return. Some companies provide a dollar-for-dollar 401(k) match which effectively doubles your money. However, watch out for vesting schedules, which spell out how long you need to stay at a company before you get to keep employer contributions to the 401(k) account. While some firms have immediate vesting, other employers require several years on the job before you get to keep part or all of the 401(k) matching funds.
Claim retirement saving tax breaks.
Saving for retirement allows you to qualify for valuable tax deductions and credits. Retirement savers can defer paying income tax on funds deposited in a traditional 401(k) and IRA, which can be especially beneficial for higher earners who are currently paying a high tax rate. Contributing to an after-tax Roth account locks in your current tax rate and allows you to qualify for tax-free investment growth and tax-free withdrawals in retirement. Low-income retirement savers who contribute to a 401(k) or IRA can additionally qualify for the saver’s tax credit, which can further reduce your tax bill or boost your refund.
Keep expense ratios low.
An expense ratio is the cost of owning a fund. A high expense ratio means a big chunk of your return is going into someone else’s pocket instead of growing your wealth. Your 401(k) plan is required to send you a fee disclosure statement each year, which explains the expense ratio and other costs of each fund in the plan. Take care to select funds with reasonable fees and consider moving your money out of high-cost funds. If you choose funds with low expenses, your money will grow faster.
Avoid fees.
Retirement and investment accounts often charge fees for trades, early withdrawals, failing to take withdrawals correctly and other specific actions you might take. Most retirement accounts charge a 10% early withdrawal penalty if you take distributions before a specific age, but there are also exceptions to the penalty if you use the money for several specific purposes. There is also usually a 50% penalty if you fail to take required minimum distributions from retirement accounts after age 72. Get to know the rules so that you can avoid triggering fees and penalties.
Combat inflation.
High inflation can reduce the purchasing power of your retirement savings. Some retirees help their nest egg cope with inflation by leaving a portion of their funds in the stock market or investing in real estate. A few types of bonds are guaranteed to keep pace with inflation. Continuing to work part-time at current wage levels can help you maintain your standard of living at a time when prices are increasing rapidly. Social Security payments are automatically increased to keep up with inflation each year. Maximizing your Social Security checks can allow you to qualify for the biggest possible Social Security cost-of-living adjustment.
Begin to protect your savings as you approach retirement.
Once you begin to accumulate a significant nest egg, it becomes more important to protect at least a portion of your retirement savings. You don’t want to encounter large losses in the early years of your retirement. Some people gradually shift their retirement funds into more conservative investments as they approach retirement. It’s generally a good idea to keep enough funds outside the stock market to cover several years worth of living expenses, so you can give the rest of your portfolio time to recover from stock market losses before taking distributions.
Diversify.
It’s important to make sure you are not overly dependent on any one source of retirement income. Instead, diversify your retirement income sources so that if any one of them fails, you will still have enough money coming in from other places to pay your monthly bills. Social Security payments and some types of pensions are guaranteed to continue for the rest of your life, no matter how long you live. Your retirement and investment accounts should include a diversified mix of assets and be gradually drawn down over time. A part-time job is a common way to bring in extra retirement income.
10 Secrets of Successful Retirement Savers:
— Start saving at your first job.
— Save with every paycheck.
— Boost your contributions.
— Get your employer to contribute.
— Claim retirement saving tax breaks.
— Keep expense ratios low.
— Avoid fees.
— Combat inflation.
— Protect your existing retirement savings.
— Diversify.
More from U.S. News
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New 401(k) Contribution Limits for 2023
12 Ways to Avoid the IRA Early Withdrawal Penalty
10 Secrets of Successful Retirement Savers originally appeared on usnews.com
Update 10/24/22: This story was published at an earlier date and has been updated with new information.
