Boost Your Retirement Savings Fast With This 6-Step Plan
What do you do when you're in your last decade of your working life, but you don't have enough money saved for retirement? Sausalito, CA financial planner Bob Goldman shared his top tips for maximizing savings during the home stretch. (See also: Essential Truths for a Successful Retirement)
Goldman created this step-by-step list for Carol Dorsett, who relocated to the San Francisco Bay Area after being laid off as photo editor at a Midwestern newspaper. Carol moved in with her sister and began training in computer skills and started job hunting.
At 56, Dorsett hopes to work for another 11 or 12 years before beginning a financially secure retirement. She has a small pension and a 401(k) account, but she had to take an early withdrawal from her 401(k) to pay health insurance premiums, for which she paid a penalty and taxes.
"My concern is, once I get a full time job, how do I start really focusing on retirement?" Dorsett said.
Goldman had her fill out a detailed questionnaire, and then offered a basic six-step plan for how to make the most of her last decade of work. While this is specific to Carol Dorsett's situation, the strategies apply to many who are nearing retirement. (See also: Retirement Planning If you're Under 30)
1. Don't Touch Your 401(k)
If you withdraw money before the age of 59 ½, like Dorsett did, you have to pay income tax on the amount you take out, as well as a 10% early withdrawal penalty.
2. Maximize Retirement Contributions
Goldman advised Dorsett to contribute the maximum to her employer's 401(k) plan, and then open an IRA to save even more. There is an $11,500–$17,500 annual limit on 401(k) contributions, depending on the type of plan. But the IRS allows workers over age 50 to make additional catch-up contributions of $2,500–$5,500, again depending on the type of plan.
3. Start a Savings Account
Your savings shouldn't stop at retirement contributions. Goldman advised Dorsett to accumulate six months to two years' expenses in her savings account as an emergency fund.
An emergency fund enables you to cover the bills if you lose your employment, or to pay unexpected expenses like car repairs, without going into debt or being tempted to borrow from a 401(k).
4. Invest in Index Funds
Once the emergency account and retirement accounts are fully funded, start investing in index funds, which give you a diversified portfolio with low management costs, Goldman said.
A recent white paper, "The Case for Index Fund Portfolios" (PDF) compares low-cost index funds with actively managed funds and concludes that investors are better off investing in all index funds. (See also: 3 Steps to Get Started With Index Funds)
5. Put Savings on Autopilot
Investment adviser Betterment advocates having your investment deposit taken out of your checking account on the first day every paycheck is available to maximize the amount of time your money is in the market and minimize the temptation to spend it.
6. Ignore Your Investments
This last step can be the toughest, Goldman said, but it's important to stay the course unless your circumstances change drastically.
"Assuming you have the right investment portfolio, you don't want to be changing it based on random opinions of friends, neighbors, relatives, or experts on TV. No one can predict the future, and 'everyone' is usually wrong," he said.
Are you nearing retirement? What steps have you taken to accelerate your retirement saving?