Whether retirement is a few years away or won't happen for decades, it's never too soon to start thinking about ways to improve your long-term financial picture. Here are a few moves you can make in the coming year to set yourself up for a secure retirement.
1. Ramp up your IRA or 401(k) contributions
What could increasing your savings rate modestly do for your future? A lot, actually. Cutting back on a few expenses to boost your monthly IRA or 401(k) contributions could make a huge difference in the course of 20 or 30 years of savings.
Of course, if you're that far away from retirement, you may be inclined to keep your savings rate status quo, and ramp up later, as retirement nears. But in doing so, you'll miss out on years of compounded returns that make savings increases so valuable.
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Imagine you're exactly 30 years away from retirement and currently contribute $250 a month to your savings plan. Let's also assume your investments generate an average annual 7% return (more on that in a bit), and that you're currently sitting on a $50,000 balance. At that rate, you're looking at retiring with about $664,000.
Now, let's say you're able to spend a bit less so that instead of saving $250 a month, you begin contributing $300 to your retirement plan. All other things being equal, you'll grow your balance to more like $721,000 instead. That's an extra $57,000 in retirement savings, all for eking out just $50 more a month, which means it's clearly worth the effort.
2. Make sure you're investing aggressively enough
Is your retirement savings portfolio invested largely in stocks? If it's not, and you're years away from retirement, you're doing yourself a disservice. Bonds are an appropriate investment for near-retirees who don't have a lot of time to ride out stock market volatility. But if you're at least 10 years away from retirement, you should go heavy on stocks to generate solid returns for your savings.
In the example above, we talked about growing a $50,000 savings balance to $721,000 by socking away $300 a month over 30 years at an average annual 7% return. That figure is an appropriate assumption for a stock-heavy portfolio, since it's a couple of percentage points below the stock market's average and also accounts for some bond investments. But if you play it too safe by loading up on bonds, you might only score a 3% average annual return. And based on our example, that would leave you with just $293,000 in retirement savings despite having increased your monthly contributions to $300.
The takeaway? Don't play it too safe with your long-term savings. If you're not sure how to invest aggressively, opt for stock-focused index funds. They take a lot of the guesswork out of investing.
3. Fund a health savings account
If you're enrolled in a high-deductible health insurance plan, you have a prime opportunity to sock away funds dedicated to future healthcare expenses. Health savings accounts, or HSAs, let you contribute money on a pre-tax basis and then invest the funds you're not using immediately for added growth. If you generously fund your HSA and carry that money into retirement, you'll have a specific source of income you can use to tackle what could be your single greatest senior expense.
You can currently save up to $3,550 a year in an HSA if you're putting money in on your own behalf, or up to $7,100 a year if you're contributing on behalf of your family. And if you're 55 or older, you can put in another $1,000 on top of whichever limit applies to you.
Let's say you're single and generally spend $2,000 a year on healthcare expenses. If you max out your HSA contributions at $3,550 instead, you'll get to invest that untouched $1,550 so it grows into a substantial sum by the time retirement rolls around. And, you'll get a tax break on that contribution. Talk about a win-win.
The moves you make today could set the stage for the comfortable retirement you deserve. It's never too early to start mapping out your financial future -- and doing so at a fairly young age could result in extra peace of mind later in life.
