Retiring in today's high-inflation, high-interest-rate environment might feel nearly impossible. But there are several things you can do early in your career that help take years off your working life. More often than not, the most effective retirement savings "hacks" are simple behaviors that you need to make sure you get right in order to succeed.
Here, we'll review three no-brainer retirement savings hacks that you'll be glad you knew about.
Start now
When it comes to accumulating significant balances in your retirement accounts -- like your 401(k) and Roth IRA -- the single best piece of advice you can get is to simply start saving and investing.
Starting early has a few benefits. First, you'll allow time to run its course and compound returns to take hold. In other words, the more time you hold your investments, the greater the exponential growth you'll see over time.
Second, the longer you stay invested, the more opportunity you'll have to collect dividends along the way. Dividends, when periodically reinvested, can supercharge your savings.
Finally, starting early allows you to take ongoing advantage of your employer's matching contribution (if it offers one). The employer match functions as a 100% return on any money you contribute to your 401(k) (up to a specified percentage), so there's absolutely no reason to leave any of it on the table.
Taken together, the earlier you start saving for retirement, the better your results are likely to be.
Image source: Getty Images.
Pay attention to expenses
Unfortunately, much of the expense associated with investing in your employer's 401(k) is hidden by fine print and administrative jargon. Most if not all 401(k) plans come with a menu of mutual funds from which the plan participants -- the employees investing in the 401(k) -- are expected to choose from. Each of these funds comes with an "expense ratio," which essentially is the cost to own the mutual fund investment.
Some legacy 401(k) plans come with unusually expensive mutual funds, and this is reflected in each fund's expense ratio. More money to the 401(k) provider ultimately means less money for you and other savers, so be careful to choose mutual fund investments that don't break the bank. Generally, any fund costing more than 0.20% annually to track the broad market indexes is probably too much.
It makes sense to stick with low-cost, passively managed index funds that track major barometers of economic activity, like the S&P 500 or the Dow Jones Industrial Average.
Don't touch the retirement money
One of the surefire ways to reduce your long-term nest egg is to withdraw money early from your retirement plan. First, if you're working with a pre-tax 401(k), you'll pay ordinary income tax on any amounts withdrawn, regardless of your age.
Next, you'll also pay a 10% penalty on the entire amount of your withdrawal if you're under the age of 59 1/2. While there are circumstances that warrant an exception to the penalty, many of them (like death or disability) are highly unusual or unlikely scenarios not considered in the early stages of one's working career.
Finally, and perhaps the most important, withdrawing money early from your retirement accounts interrupts compound interest and tax deferral -- two of the central reasons you invested in your 401(k) in the first place. Rarely in life is the prudent advice to do absolutely nothing, but in the context of your 401(k) or your Roth IRA, you should try to be patient until it's actually time to retire.
It's the small things that ultimately matter
If you can manage to start early, stick with only low-cost investments, and make a commitment to leaving your investments alone, there's an above-average probability that you'll end up with a solid chunk of money when it comes time to retire. These things may sound easy but can be difficult if you don't have the cash flow to start early or if you're facing a high-interest debt load. Also, you might face an emergency at some point in life that requires you to touch your retirement savings.
Like most things in life, sound financial planning comes down to getting a few straightforward things right. Once you've got them squared away, you can rest assured that you're doing all you can to lock in a financially successful retirement.
