The average adult 65 and older has just $232,710 saved for retirement -- far short of the $1 million or more many workers estimate they'll need for a comfortable future. The idea of running out of money in your final years is scary, but you can reduce this risk by taking key steps now to build your retirement account balances. Here are five worth considering.
1. Claim your 401(k) match
Claiming your 401(k) match should be your top priority each year if you're eligible for one and can afford to do so. This is extra money you only get by making 401(k) contributions. Otherwise, you forfeit these funds. But there's a bigger issue here.
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You're also giving up what that money could have turned into down the road. A $1,500 match today could be worth more than $26,000 after 30 years if it earns a 10% average annual rate of return. That could cover several months of living expenses for you in retirement.
Check with your employer if you're not sure how its 401(k) matching system works. Usually, you get $1 or $0.50 for every $1 you contribute up to a certain percentage of your income. Increase your 401(k) deferrals if possible so you can claim your 2024 match before year-end.
2. Make regular contributions
You don't have to stop making 401(k) contributions once you've claimed your match. The money you invest in one of these accounts can grow to be worth tens of thousands of dollars over time, and your contributions will help you save on taxes, too. More on that later.
How much you choose to save will depend on your financial situation and your goals for retirement. Some argue that you should save at least 10% to 15% of your salary, but you may feel more comfortable setting a personal goal and working toward that.
If you're not able to save as much as you'd like, start from where you are, even if that means you only set aside a few dollars per month. Try to increase your contributions by 1% of your salary per year if you can do so. That's only $50 more per month for someone making $60,000 per year.
3. Make catch-up contributions if you're eligible
Adults under 50 may save up to $23,000 in a 401(k) in 2024, but those 50 and older can set aside as much as $30,500 this year. The extra $7,500 is known as a catch-up contribution. It's designed to help those who weren't able to save as much as they wanted to when they were younger.
You can make catch-up contributions as long as you'll be at least 50 by the end of 2024. You don't have to wait until your birthday to exceed the $23,000 limit for adults under 50.
It may not be an option if you're short on cash, but those with money to spare can make up significant ground with catch-up contributions. Keep in mind that these limits change over time, and you may be able to set aside even more in the future than you can today.
4. Reduce your fees
Some 401(k)s have high-cost investments that eat into your profits over time. These fees come directly out of your account, so most people don't even realize they're paying them or that they might be able to reduce them.
Check your prospectus or 401(k) statement to see what you're paying in fees. Most 401(k)s require you to invest in some sort of fund, so you'll probably see something known as an expense ratio, which is listed as a percentage. That tells you how much of what you have invested in the fund goes to the fund manager as an annual fee. For example, if you have $1,000 invested in a fund with a 1% expense ratio, you pay $10 per year to own that fund.
Generally, you'd like to keep your expense ratios at or below this level if you can. If you're paying too much, you can try investing your money in an index fund, if your 401(k) offers them. Or you might prefer to keep the bulk of your savings in an IRA so you have greater control over what you invest in.
5. Choose the right time to pay taxes
If your company offers a Roth 401(k) as well as a traditional 401(k) option, you'll have to decide when you want to pay taxes on your funds. Traditional 401(k) contributions reduce your taxable income this year, but then you owe taxes on your withdrawals later. You don't get a tax break for Roth 401(k) contributions in the year you make them, but you're allowed tax-free withdrawals in retirement.
Traditional 401(k)s could be a better choice if you expect to drop into a lower tax bracket in retirement. In this case, waiting to pay taxes could save you some money compared to paying a higher tax rate on your contributions upfront. But if you expect your tax bracket to be the same or higher in retirement, it's tough to beat the tax-free withdrawals a Roth 401(k) offers.
It's also fine to split your money between both types of accounts if you'd like. But just remember, the annual contribution limits apply to all your 401(k)s. You can't stick $23,000 in a traditional 401(k) and another $23,000 in a Roth 401(k).
You may not be able to follow all of these tips, and that's OK. Pick one or two to start with. Then, after you've done your best with those, revisit this list to decide if any of the other moves make sense for you. A good retirement plan adapts with you over time, so there's nothing wrong with making changes as you go.
