Saving for retirement is like exercising, healthy eating, and not smoking. Noble goals we don’t always get round to. This article will give you 9 ways you can start saving for your retirement today (or the next business day). We will also see how low-cost wealth management companies and brokerages can help you diversify your portfolio without the large fees of traditional investment advisers. Let’s start with a brief (I promise) pep talk on the virtue of starting to save for retirement early.
When it comes to retirement planning, the earlier you start saving, the better. Because of the compounding effects of interest, the longer money is set aside in a retirement account, the longer it has to earn interest on the principle, thus creating amplified growth on the original amount invested. So someone who starts saving at age 25 will end up with a larger account balance at retirement than someone who started saving at age 35 or 45, even if they contribute the same amount (or even more) to their retirement fund. Consider this. If you start saving $405 a month by age 25, you’ll earn a million dollars by the time you turn 65, assuming an average annual return of 7%. Assuming the same growth, someone who starts at age 30 will have to save $585 a month, $51,300 more, to achieve the same goal. You see? Time is money, literally.
How much money will you need in retirement and how do you know if you are on pace to save enough? Here are some benchmarks you can use as a guideline:
By age 35, you should have saved an amount equivalent to your annual salary.
By age 45, you should have saved three times your annual salary.
By age 55, you should have saved five times your salary.
By age 67, at retirement, you should have eight times your annual pay.
How do you measure up? Not quite there yet? Here are 9 ways to speed up retirement savings:
Maximize Your Employer-Sponsored 401(k) or 403(b)
For most people, this is the most convenient way to start investing for retirement. 401(k)s are made up pre-tax funds and employers often provide matching contributions, which makes 401(k)s a fast and tax efficient method to save for retirement. The money is automatically withheld as a payroll deduction, which makes it easy to start and forget about. A useful feature when it comes to saving. As of 2016, employees can contribute an additional $18,000 ($24,000 if you are 50 or over) toward their 401(k). If you leave your job, you can roll the account balance over into a new employer’s 401(k) or your own Traditional IRA (there would be tax implications to consider if you converted it to a Roth IRA). A 401(k) is usually offered by for-profit companies. Public education workers, employees of nonprofits, and self-employed ministers, on the other hand, generally get a 403(b).
As of 2016, employees can contribute an additional $18,000 ($24,000 if you are 50 or over) toward their 401(k). If you leave your job, you can roll the account balance over into a new employer’s 401(k) or your own Traditional IRA (there would be tax implications to consider if you converted it to a Roth IRA). A 401(k) is usually offered by for-profit companies. Public education workers, employees of nonprofits, and self-employed ministers, on the other hand, generally get a 403(b).
Self Employed? Create An SEP/Simple IRA
These types of retirement plans are predominantly used by self-employed individuals or small business owners. In 2016, small business owners can contribute up to 25 percent of a worker’s income or $53,000, whichever is less, to an SEP. If a business with an SEP has more than one employee, it must contribute to the accounts for all who meet the company’s policy requirements. With a Simple IRA, employers must make some type of contribution to the employees’ accounts while employees can make additional contributions. In 2016, employees can contribute up to $12,500, with an extra $3,000 allowed for those over 50 years old. These plans allow small businesses to set up IRAs with less paperwork than a 401(k).
Get A Tax Deduction With A Traditional IRA
Anyone can contribute up to $5,500 a year to an IRA, $6,500 if they are 50 or order. The benefit of contributing to a Traditional IRA is that you get a tax deduction in the year you contribute. Because you get the up-front tax deduction, you do have to pay taxes when you withdraw money from your account in retirement. Assuming that during your working years, you are in a higher tax bracket than you will be in upon retirement, this will give you an overall tax saving.
Prepay Your Taxes With A Roth IRA
The biggest benefit that you get with a Roth is tax-free growth. Although Roth funds are made up of after-tax dollars, your investment grows tax-free, and you pay no tax on withdrawals after you reach age 59 1/2. Also, there is no mandatory withdrawal at age 70 as with other retirement funds. You can even withdraw the amount you contributed — just not the interest — with no penalty because you have already paid taxes on your contributions. If your income is higher than $131,000, for an individual, or $193,000, for a couple filing jointly, your allowed contribution is reduced.
Consider Contributing To A Health Savings Account
Health Savings Accounts are typically used by people with high-deductible health insurance plans so they can save money tax-free. You can contribute up to $3,350 a year for an individual or $6,650 for a family. If you’re 55 or older, you can contribute $1,000 more. The funds may be withdrawn to pay allowable medical expenses. If you don’t spend the money, it rolls over indefinitely. Once you’re 65, you can withdraw money for any reason without penalty, but there will be income taxes to pay on the money you withdraw. Alternatively, you can continue to use it tax-free for medical expenses during retirement.
* This is not the same as a flex spending account that can be used to pay for health expenses during a particular year. A flex spending account is set up on a use-it-or-lose-it basis; the money in a flex spending account does not roll over from year to year.
Get A Return of Premium Life Insurance Policy
Return of Premium Life Insurance Policies works as a term life insurance. The insurance policy coverage period is only for a set amount of time, maybe 20 or 30 years. If the policy expires and you are still alive and well, you receive the amount paid in premiums back. This type of life insurance acts as a savings account as well as a life insurance. The premiums are higher than a simple term life insurance policy, but it guarantees you will get something back from your policy.
Combine Savings And Insurance With A Whole Life Insurance Policy
Whole life insurance policies have higher premiums than standard term insurance policies. However, they also accumulate a cash value policyholders can access during their lifetime. This product combines an insurance policy and a savings account. The insurance is payable upon death, and the cash value is available to the policyholder to withdraw or borrow against. This product is similar to a return of premium life insurance policy with the exception that the cash value is not restricted to the premiums paid. The cash value can be higher or lower than the premiums paid depending on market performance.
Make A 529 Plan Part Of Your Retirement Planning
Yes, having the foresight to save for your children’s college education can be a helpful retirement tool. For many families, sending children away to college comes relatively close to retirement. Even if retirement is still 20 years away, taking on such a big expense, and possibly neglecting to set money aside for retirement, can have devastating financial consequences for your retirement years. You don’t want to be in the position that you have to choose one over the other. Setting up a 529 Plan can also serve as a useful place for grandparents to deposit gifts over the years.
Hedge Your Bets With Annuities
Although annuities have notoriously high fees, they can be a useful addition to a well-diversified retirement portfolio. Their main advantage is the security they provide investors. While other investment vehicles can grow or shrink depending on their market performance, an annuity has a guaranteed payout.
As you can see, there are many options when it comes to retirement investments. Would you like to build the best portfolio for your personal goals and risk tolerance? Low-cost wealth management companies, such as Betterment and Personal Capital, offer an inexpensive way to diversify your retirement investments without wasting your money on unnecessary fees.
Gina Young is an accomplished finance writer who has written for publications including Examiner.com, Lexington Law, Talk Markets, CreditRepair.com as well as her own blog (Money Savvy Living), giving budgeting and frugal living advice. With a bachelor’s degree in Accounting and Finance from Ashland University and a MBA from Indiana Wesleyan University, Young has impressive credentials in many aspects of investing, retirement planning, and personal finance.