Most people realize that they need to save more for retirement, but they don't know where to start. Indecision can be costly if good habits are delayed too long, so a great retirement savings hack can be really valuable for your financial plan. Consider these three strategies to boost your savings rate and build toward retirement goals.
1. Take advantage of HSAs if you can
Health savings accounts (HSAs) are an underutilized retirement savings tool. These accounts are meant to encourage asset accumulation for people with high-deductible health insurance plans (HDHPs), and they aren't explicitly geared toward retirement. However, they have several fantastic features that can deliver exceptional value for seniors. Therefore, if your employer offers HDHPs as health insurance options, it's worth taking a closer look in order to be able to take advantage of HSAs.
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Qualifying contributions to HSAs are made with pre-tax dollars, meaning that these savings reduce taxable income. They function similarly to 401(k)s or traditional IRAs in that regard. As with those common retirement accounts, funds in an HSA can be invested for growth. HSA funds that are spent on medical expenses can then be distributed without incurring any taxes, similar to the benefits provided by Roth IRAs -- except HSA distributions aren't restricted by age.
These tax benefits can boost total savings rates very effectively. Most people will incur medical costs at some point in their lives, so these assets are likely to be used. In the event that HSA funds are unused, they roll over to the next year and can continue to grow. People over age 65 are able to withdraw cash from these accounts without penalty, so they function like a traditional IRA in that regard.
2. Take full advantage of employer matching programs
Employee benefits packages often include a 401(k), and many of those offer an employer contribution match. These perks come in a variety of formats, but they all mean that your employer will add extra funds to your retirement account based on how much you save, up to a certain amount. For example, many companies will contribute 100% of whatever amount you contribute, up to 4% of your income. In that case, you're essentially doubling the savings rate.
Regardless of the specific terms in your benefits package, the employer match is essentially free money. Numerous factors influence the amount of your income that you should save in a retirement account, so there's no universal rule for that. However, most people can improve their outcomes by contributing every dollar that an employer is willing to match.
3. Diversify your retirement tax liability
Accountants and financial advisors usually love the tax benefits provided by 401(k) plans and traditional IRAs. Most people wind up in lower tax brackets during retirement, so it makes sense to defer those payments.
However, going all-in on any strategy can create risks. Deferring taxes might not be advantageous if rates are significantly higher in the future, and many people think that taxes will indeed be higher down the road. Qualified retirement accounts also remove some flexibility for overall financial planning, with early withdrawals incurring a penalty.
To address those issues, it's a good idea to use multiple account types. Consider using a Roth IRA or regular brokerage account in conjunction with a 401(k) for retirement savings. This makes assets more accessible prior to retirement. It also creates distribution options for retirees, allowing them to selectively withdraw from accounts based on personal circumstances and tax rates.
There's a nice little knock-on effect created by this account diversification strategy, too. People are encouraged to save more in order to fund various accounts. It can be rewarding to see assets grow in different buckets, and it's easier to stay actively engaged in your own retirement planning this way. A 401(k) is often a more passive account, while IRAs tend to be a bit more hands-on, even if those just contain index funds. This helps to prevent things slipping through the cracks without necessarily being overwhelming.
