Retirement ticks closer every day, yet your nest egg barely seems to grow. Sound familiar? You're definitely not the only one. Shoveling money into a retirement account isn't always enough to get you where you want to go. You also need the right strategies to help you make the most of that money. Here are three simple tips that can help you take your retirement savings to the next level.
1. Claim your full employer match
An employer match is a bonus your employer gives you for saving for retirement. How much you get depends on your company's matching formula, your salary, and how much you contribute to your retirement account annually. In some cases, it's several thousand dollars.
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That's not even considering what that match could become after it's been invested for a few years. A single $3,000 employer match could be worth nearly $23,000 after 30 years with a 7% average annual rate of return, and if you earned a $3,000 match every year for 30 years, you're looking at close to $300,000 just from matches alone. There's no good reason to say no to that unless you need every dollar for your bills.
Talk to your company's HR department if you're not sure how your company match works and try to contribute enough to get the full match every year. You should also inquire about the company's vesting schedule if you've worked there for five years or less. If you leave a company before you're fully vested, you could forfeit some or all of your match.
2. Add an IRA
IRAs are great complements to 401(k)s and other workplace retirement plans because they give you more flexibility in how you invest your money. Most 401(k)s limit you to a few mutual funds, while IRAs allow you to invest in stocks, bonds, mutual funds, exchange-traded funds (ETFs), and a lot more. This freedom enables you to choose investments that better match your timeline and investing goals, and that can help your savings grow more quickly without exposing you to unnecessary risk.
When you open an IRA, you can also choose when you want to pay taxes on your money. Most 401(k)s are tax-deferred, which means you pay taxes on your distributions but not your contributions. Traditional IRAs work the same way. Roth IRAs are different. You pay taxes on your contributions, but distributions in retirement are tax-free.
Roth IRAs make sense for those who think they're earning about the same or less now than they'll spend annually in retirement, because paying taxes on just their contributions today will save them money compared to paying taxes on contributions and earnings later on. Those who believe they're earning more than they'll spend in retirement should consider a traditional IRA. You could also open one of each, though your combined contributions can't exceed the annual limit -- $6,000 in 2021, or $7,000 if you're 50 or older.
If you are going to add an IRA to your retirement plan, decide when and how much you're going to contribute. You should always start with your 401(k) if it offers a match. Then you could switch to the IRA if you prefer the flexibility it offers, and then switch back to your 401(k) if you max out your IRA.
An IRA is also a great place to stash some spare cash at the end of the year because you can make prior-year contributions up until the tax deadline. This enables you to invest year-end bonuses and cash you receive for the holidays.
3. Keep your fees down
Investing costs money, but you can control how much to some extent by selecting your investments carefully. Index funds are a great option for most people because they offer instant diversification to help protect your money against loss, and their annual fees, known as expense ratios, are low.
If you invest in stocks or ETFs, you could incur commission charges, depending on your broker. These are transaction fees you pay every time you buy or sell an investment. Fortunately, many of the most popular brokers today don't charge commission fees. Look for one of these if you're trying to keep as much of your savings as possible.
Keep on contributing
The three moves above can help you stretch your dollars further, but they're not a substitute for regular contributions. Think of it like this: Your retirement plan, including the accounts you contribute to and your investments, are like a car and the cash you put in is like the gas that makes the car go. If you don't have both pieces, you're not going to get very far.
Set up automatic contributions if you can and try to up your contributions every time you get a raise. Together, with the strategies discussed above, that can help you grow your savings more quickly and reach your retirement goals faster.
