10 Easy Ways to Supercharge Your Retirement
The majority of Americans today are worried about not having enough money for retirement, according to a recent Gallup survey. It's no wonder, either, as retirement safety nets like pension plans and social security benefits are quickly diminishing. In the future, only those who have taken charge of their retirement plans will have a chance at living out those golden years in comfort. (See also: Retirement Planning If You're Under 30)
1. Build Your Emergency Fund
On the surface, putting aside 3–6 months of expenses in an emergency fund doesn't seem to have much to do with building a retirement fund. Even so, having to raid your retirement account to pay for unexpected car or roof repairs can come with stiff tax penalties. Plus, you want your money compounding in your account, where it can be doing some of the heavy lifting for you. (See also: 2 Investing Concepts Everyone Should Know)
2. Cut Back on Expenses
If you're not sure where to find the money to fund your retirement plan, start looking for ways to cut back. Buy a cheaper car, dine out less often, cut impulse spending, or cancel subscription services. Small amounts compounded over long timeframes can add up to a healthy nest egg. Just $70 per month, for example, would add up to $160,000 in 35 years, assuming an average investment return of 8% per year. (See also: 7 Unnecessary Expenses You Can Cut Out Today)
3. Start Early
When if comes to investing, time is your best ally. The math behind compound interest shows that those who start early don't have to save nearly as much as those who start later in life. The Simple Dollar ran the numbers to see how much an investor would have to put away per month to retire with $2 million (assuming a 7% average annual return).
- Start at age 20, and you'll have to save $510 per month.
- Start at age 25, and you'll have to save $725 per month.
- Start at age 30, and you'll have to save $1,050 per month.
- Start at age 35, and you'll have to save $1,530 per month.
- Start at age 40, and you'll have to save $2.270 per month.
- Start at age 45, and you'll have to save $3,480 per month.
- Start at age 50, and you'll have to save $5,600 per month.
The best part for young savers? That hypothetical saver who started at age 20 put away only $245,400. That amount compounded over 45 years to 2 million dollars. In contrast, the saver who started at age 50 had to put away almost four times as much — $1,008,000 — to save the same amount for retirement.
4. Pay Off Credit Card Debt
Here's another piece of advice that doesn't seem to directly impact your retirement balance, but it really does. Paying off short-term debts frees up your monthly payments so they can be used to further pad your retirement plan. You'll also save on all those annoying and costly interest payments. (You could be paying more in interest per month than you are to your principal balance, if you're still paying the minimum due each month!) Pay yourself with that money instead. Your credit card CEO already has enough stashed away in his retirement fund. (See also: How Much Does Your Credit Card Debt Cost You)
Now, Let's Fund It
5. Max Out Your 401(k) Employer Match
Once you've freed up some funds, you can use the available tax-advantaged retirement programs to your advantage.
The first stop for most investors is their company sponsored 401(k). If your employer offers an employee match on contributions, grab it. In other words, invest in your plan up to the amount of the match (e.g., if your employer offers a 100% match on the first 3% contributed, you should be contributing at least 3%; if your employer offers a 50% match on the first 6% contributed, you should be contributing at least 6%). Contributing up the company match is the equivalent of getting a pay raise. The only catch is that is has to go directly into your retirement fund (which is actually a pretty great thing).
6. Fund Your IRA(s)
The annual IRA contribution limit for 2014 is $5,500 ($6,500 if you're 50 or older). Contributions to a traditional IRA are tax deductible for the year the contribution is made. A contribution to a Roth IRA, meanwhile, is not deductible, but all earnings are tax free when you withdraw them in retirement.
The rule of thumb is generally to fund the Roth option if you expect your tax bracket at retirement to be higher than the one you're in today (which will generally be the case for young people with successful careers ahead of them). Some experts assume income tax rates will only rise and suggest the Roth option may be best for everyone. Your tax advisor can help you decide which is right for you.
To fully fund a Roth IRA in 2014, income limits must be below $181,000 for a married couple filing jointly and $114,000 for a single filer. To fully deduct traditional IRA contributions your income must be below $96,000 if you're married and filing jointly or $60,000 if you're a single filer. Check out the IRS matrixes for traditional IRAs and Roth IRAs for full details, including phase out ranges.
7. Income Too High? There's an IRA Workaround
You can still benefit from the tax advantages of a Roth IRA even if your income exceeds the contribution limits. Anyone, regardless of income level, can contribute to a traditional IRA and then immediately convert that traditional IRA to a Roth IRA. After the conversion, you'll receive all the benefits of the Roth IRA, namely tax-free growth on investment earnings. There is one catch, however. If you already own a traditional IRA, you'll have to convert your entire balance, not just the amount contributed for the year. That means you'd owe ordinary income taxes on the entire converted balance. In short, don't make this move unless you have the funds available to cover the taxable event.
8. Your Non-Working Spouse Can Have an IRA, Too
Even at-home parents can save for retirement. A working partner can open a spousal IRA for a non-working spouse and contribute an additional $5,500 per year ($6,500 if over age 50) in a separate account for the spouse. (Income limits still apply.)
9. Max Out Your 401(k)
Once you've fully funded your IRA(s), come on back to your 401(k) and contribute as much as you can, up to the $17,500 annual cap. You won't get a company match on these additional contributions, but the tax benefit of contributing pre-tax can be more lucrative than parking your money in a regular, taxable account.
Once You Save It, Don't Spend It
10. Don't Borrow From Your 401(k) or Take Money From Your Roth IRA
Taking money out of your 401(k) means you miss out on potential market returns and forego your employer's match, until your loan is repaid. Plus, you'll need to repay the loan within 60 days in the event of a job loss. If you don't, the IRS will treat your loan as a distribution, meaning you'll owe ordinary income tax on the loan amount plus a 10% early distribution penalty. Also, once the money has been out of your account for 60+ days, it can't be put back in.
There are certain qualified distributions allowable for Roth IRA funds, including to buy or build a first home. Although not taxable, these distributions aren't necessarily a good idea. Any money taken out won't earn investment gains and won't be available as income when you retire. Just because you can, doesn't mean you should. (See also: 10 Worst Ways to Pay off Your Credit Card Debt)
The retirement landscape is changing and tomorrow's successful retirees will be those who take charge today and pay off debt, max out their tax-advantaged retirement plans, and keep their plans funded (and do any necessary borrowing elsewhere).
How ready do you feel for retirement? What retirement planning strategies have you enacted? Please share in comments!