If you want to have a financially comfortable retirement, it pays to start saving early. The sooner you get moving, the easier it'll be to reach your financial goals.
However, it's always a challenge to find ways to save. The most successful retirement investors not only make it a habit to set money aside for their golden years but also boost their commitments to their retirement savings as they grow older. Many of them use three tools to help them get to where they want to go:
- They increase their automatic contributions to workplace retirement plans.
- They invest all or part of their raises.
- They take advantage of opportunities to make catch-up contributions to retirement accounts.
Let's look at each of these in more detail.
1. Adding a percentage point
If you're fortunate enough to have a 401(k) plan or other workplace sponsored retirement account available from your employer, it can be one of the most useful tools you have to boost your retirement savings. The contribution limits on 401(k)s and similar plans are huge, with 2019 limits of at least $19,000 giving most people more than enough leeway to put as much as they can afford into their retirement accounts.
Most people can't afford to put $19,000 toward their retirement. Instead, they typically take a percentage of their salary and have their employer put it automatically into their 401(k) accounts. One popular way to boost savings is to take whatever percentage of your salary that you're saving and kick it up by a percentage point. So if you're at 3%, you'd go to your employer and ask to have 4% taken out of future checks.
Saving an extra percentage point isn't going to be a huge hit to your budget, as for someone who gets paid $60,000, it'll cost you less than $12 a week. Moreover, your paycheck won't go down by that full amount, as the tax savings you get from making a 401(k) contribution gives you some of that contributed amount back. But if you can do those percentage-point increases periodically over the course of your career, it can make a huge difference to the size of your nest egg.
2. Give your raise to your retirement
Another painless way to boost your retirement savings is to make increases when you get a raise. For most people, it's painful to see your take-home pay go down when you divert some of your pay toward your retirement, but it's a lot easier to deal with your pay not going up as much as it otherwise would when you get a raise.
Some people commit all of their extra pay toward retirement, while others take a portion and let themselves enjoy the rest as a boost to their current standard of living. The best strategy depends on your own personal situation, but either way, keeping your retirement in mind when you get a pay boost can be a good long-term savings strategy.
3. Use those catch-ups
Lawmakers understand that many people procrastinate their retirement saving. Accordingly, they added provisions to key laws to make it easier for those who are approaching retirement age to put more toward their savings. These are commonly referred to as catch-up contributions.
In particular, retirement accounts like 401(k)s and IRAs allow those who are 50 or older to put in more money. For 401(k) plans, the extra amount is $6,000, boosting 2019's $19,000 maximum to $25,000. For IRAs, you can contribute an extra $1,000 if you're 50 or older, bringing the normal 2019 limit of $6,000 up to $7,000. By striving to use that catch-up contribution amount to its fullest, you'll be able to hit the finish line at full speed.
Be smart with your retirement savings
It's important to save for retirement, and the sooner you start, the better off you'll be. By using these tips, you'll be able to save more as your career progresses and get to the point at which financial independence can become a reality.