High inflation has taken a toll on everyone's finances over the last year, with effects that could last long into the future. The number of workers who feel confident they'll be able to save enough to retire comfortably has plummeted, according to the Employee Benefit Research Institute's 2023 Retirement Confidence Survey. Currently, less than two-thirds of workers feel sure they'll be able to save what they need.
If you're among this group, thinking about your future can be distressing. But there are things you can do to increase your odds of retiring comfortably. Here are three tips to get started.
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1. Prioritize personal savings at every age
Saving enough for retirement has always been a challenging task, and inflation has made it even more so. But it's important that you still do your best to save what you can for retirement, even if you plan to remain in the workforce indefinitely. You never know what could happen to you in the future, and the more money you have to fall back on, the better off you'll be.
If you're struggling to save money for retirement, evaluate why that is and what you can do to remedy the situation. For example, if you have to devote a large percentage of each paycheck to your household bills each month, it could be worth exploring more affordable living options. Or you could seek out ways to boost your income, like starting a side hustle or finding a better-paying job.
It may not be easy, but every dollar counts. Don't get discouraged if you can only set aside a few dollars per month. A $5 monthly investment doesn't seem like much, but that could grow to be worth over $7,000 after 30 years, with an 8% average annual rate of return. And if you put raises and windfalls, like year-end bonuses and tax refunds, into your retirement accounts, as well, you could grow your balance even faster.
2. Pick the right retirement accounts
You can maximize your savings growth by choosing the retirement accounts you think will give you the best financial benefits. If you have access to a 401(k) that offers a company match, it may be the best place to begin. Whenever possible, try to contribute at least enough to claim your full match each year so you don't leave this money on the table.
If you don't have access to a 401(k) or yours doesn't provide a match, consider an IRA, instead. These accounts typically have lower fees and give you more freedom to invest your money in whatever way you see fit. You can also choose when you want to pay taxes on your funds.
Traditional IRAs give you an upfront tax break when you make your contributions, but you must pay taxes on your contributions and earnings when you withdraw the funds. This could make sense if you believe you'll be in a lower tax bracket in retirement than you're in right now.
Otherwise, a Roth IRA could be the way to go. You'll pay taxes on your contributions when you make them, but your withdrawals will be tax-free in retirement.
A health savings account (HSA) is another great option for those who are eligible. As long as you have an individual health insurance plan with a deductible of $1,500 or more or a family plan with a deductible of $3,000 or more, you can set aside up to a respective $3,850 or $7,750 in 2023. And adults 55 and older can add another $1,000 to these limits. You'll get an upfront tax break on your contributions, and the money you spend on medical expenses at any age is tax-free.
3. Focus on low-cost investments
All investments have fees, but some charge more than others. If you want to grow your wealth as quickly as possible, focusing on low-cost options can help.
Index funds are a great choice for many investors. These are bundles of investments that mimic the performance of a market index, like the S&P 500. Essentially, when the index does well, so does the index fund.
These investments have expense ratios, which are annual fees all shareholders pay that are charged as a percentage of your assets. Index fund expense ratios can be as low as 0.03%, though, which means you'd only pay about $3 for every $1,000 you have invested in the fund.
There are plenty of other investments out there, each with its own fee schedule. Review these before deciding where you'd like to invest your money. When dealing with expense ratios, try to keep them under 1% of your assets whenever possible so you can hold onto more of your earnings.
Even if you're doing all of the above, it can be difficult to gauge what your finances will be like in retirement, especially when it's decades away. So make sure you also schedule time to review your retirement plan and the progress you've made toward your goal each year. If you notice any opportunities to grow your savings more quickly, update your plan accordingly.
