- Come up with a strategy to automatically save at least 15% of your income.
- Use the advantages of different retirement accounts to minimize taxes and maximize savings.
- Invest your savings for growth, but make sure you manage volatility.
If you’re having some doubts about your retirement savings plan, you’re not alone. Surveys suggest that one-third of people aren’t confident in their financial security through retirement, and that one-quarter of people expect to work into their 70s.
There’s no one-size-fits-all plan to guarantee financial success in your golden years, but there are a handful of important strategies that people of any age can use. Consider adopting these plans to help you retire with the right amount saved up.
1. Save the right amount
If you want to meet your retirement goals, you have to save the right amount. It’s not the most exciting part of your retirement plan, but it’s the most important. This applies to every person and household, regardless of your age.
It’s tough to say exactly how much you need to save, but the general guideline is 15% to 30% of your income. It really depends on the amount you make, what rate of return you can achieve on your savings, and how much cash flow you’ll require in retirement. Regardless, you’re going to struggle to retire comfortably if you don’t regularly reach that 15% savings rate.
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The best savers are the ones who keep score. They set aside a specific amount of each paycheck, keep a budget, and track where all their money is going. If you can direct deposit a certain amount of income so that it goes into an account that’s separate from your checking account, then you’ll have an advantage. Financial planners often recommend “paying yourself first”, meaning that savings should be the first place your income flows, rather than simply being what’s left after you’re done spending.
Don’t make it hard to stay disciplined, and measure your progress.
2. Take full advantage of retirement account benefits
Make sure you’re using all the tools at your disposal. If your employer offers a 401(k) match, it’s probably a good idea to contribute up to the amount they’ll match. Anything short of that leaves money on the table.
Special tax treatment in retirement accounts can also be huge for your financial plan. Young professionals should consider a Roth IRA. Roth contributions won’t reduce your taxable income, but these accounts grow and can be distributed tax-free in retirement. That makes them perfect for people who haven’t hit their peak earning years and have a long time horizon to maximize growth.
Meanwhile, more experienced professionals who are near peak earnings might be more eager to find tax deductions. Contributions to a 401(k) or traditional IRA are generally tax deductible. Distributions from those accounts are eventually taxed as ordinary income. If you think the income tax rate down the road will be lower than your highest bracket today, you could benefit by delaying those taxes.
You don’t want to lock up all of your savings in qualified retirement accounts, but using the tools at your disposal can put more money in your pocket in the future.
3. Balance growth and volatility
Putting your savings to work is the most fun part of retirement planning. Investing in securities is an important way to grow your assets, but you have to make sure your investments are aligned with your risk tolerance.
Young people don’t need to worry about volatility so much, since they have decades to ride out market cycles. In your 20s and 30s, prioritize growth in your retirement accounts. Don’t freak out when growth stocks endure temporary down turns.
As you get closer to retirement, it’s important to avoid the huge swings that hit the stock market from time to time. Weave in bonds, dividend stocks, and cash accounts to protect yourself. You can’t just give up on stocks entirely though — even at 65 you probably have 20 years to 30 years worth of expenses to cover. You’ll need to keep getting some growth out of your savings.
4. Consider an HSA
Health savings accounts (HSA) are a great option for people of any age who have a high deductible medical insurance plan. Contributions to these accounts are tax deductible, and unused contributions roll over to the next year. These accounts can also be invested for growth. The funds can only be withdrawn to pay for medical care, but they are accessed tax-free if used properly.
HSAs aren’t formally for retirement, but they can absolutely be used in retirement. That’s relevant, because most people incur significant healthcare costs in their later years. The average person spends more than $5,500 each year for medical care after the age of 65. If you need that cash along the way to pay for a medical emergency or healthcare for your kids, the money is available, so this is a flexible tool.
You can reduce taxes, invest for growth, and fund your retirement healthcare expenses with an HSA. It’s hard to ignore any account that delivers all those options.