If you have already started saving for your retirement, congratulations! You’re on the right path. However, just saving money will not be enough to ensure a comfortable retirement if you don’t make the right decisions concerning your plan.
The following tips will help you get the most out of your retirement savings:
Find a Plan That Works for You
If your employer provides a 401(k), you are fortunate and should take maximum advantage. Congress created 401(k) plans in the 1980s as a supplement to pensions. Pensions provided retirees with a steady income, but they became more expensive and most employers replaced them with 401(k)s. With a 401(k), employees agree to have a certain percentage of their paychecks deposited in an account. These funds are not taxed until withdrawn for retirement. Additionally, most employers will match the amount of money the employee contributes up to a set amount.
However, a 401(k) is not your only option. Another great option is through an Individual Retirement Account (IRA). With a traditional IRA, you don’t have to pay taxes on your investments until you withdraw the funds during retirement. For instance, if you earn $50,000 and contribute $5,500 to an IRA, your taxable income amount falls to $44,500. In addition, your contribution grows tax-deferred. You save not only by deferring tax payments but typically paying taxes at a lower rate, since you probably will be earning less when retired.
Another option to consider is a Roth IRA. You don’t get a tax deduction on your contributions, but you won’t have to pay taxes on withdrawals when you retire.
Keep in mind that there are limits to how much you contribute annually regardless of whether you have a traditional IRA or a Roth IRA or both. and those limits often change from year to year. In 2017, you can contribute up to $5,500 if you’re under the age of 50 and, if you’re 50 or older, you can contribute an additional $1,000 catch-up contribution for a total of up to $6,500.
Don’t be Stingy
The Center for Retirement Research at Boston College recommends families save at least 15 percent of their earnings annually. Fifteen percent will allow you to replace 70 to 90 percent of your income in retirement. Granted, that can be a burden at the start of your career, but the Center recommends you reach that amount as early as possible.
While many plan administrators recommend increasing your savings by one percent annually, the Center advocates increasing your contribution by at least two percentage points each year, up to a minimum 15 percent.
Have a Properly Allocated Portfolio
You have a lot of investment options — stocks, bonds, CDs, Exchange-Traded Funds and mutual funds. It’s easy to get confused about which one or mixture is best for you, and a lot of people are too conservative with their allocations. Talk with your financial adviser about how much risk you can handle and take into consideration how many years you have before you want to retire.
Never, Never Cash Out Your Retirement Savings
Life can take unexpected turns, and if you haven’t saved enough money, you might be tempted to withdraw from your retirement savings before reaching retirement age. Don’t! You will pay a 10 percent penalty plus taxes, and you’ll lose out on the interest growth.