A popular Chinese proverb states that the best time to plant a tree is 20 years ago. The second best time is today. I believe the same is true when it comes to saving for retirement. Whether you’re 40 years from retirement or 10, there are plenty of things you can do to maximize your retirement contributions so your money works as hard for you as you did for it.
You just need to know what those strategies are and determine which strategy – or combination of strategies – best fits into your lifestyle and circumstances. Below are 7 ways to maximize your retirement contributions and increase your chances of retiring when and how you want.
1. Don’t Wait – Start Making Retirement Contributions Now
The ability to build real wealth and, ultimately, financial security for retirement, doesn’t come from good savings habits alone. It also comes from the power of compound interest. And the thing about compound interest is that it needs time to produce the most powerful desired results.
Unlike simple interest, in which interest is only earned on the principal in a savings or investment account, compound interest is calculated from both the principal as well as the interest the principal has earned in previous periods. As more interest is compounded and added to the principal, the more exponential growth occurs.
This is why diligent savers may not see real exponential growth until decades after they’ve initially begun saving. It’s never too late to start saving for retirement, but the earlier you start, the more time you have for compound interest to take effect and exponentially increase your retirement savings.
2. Take Full Advantage of Your Employer Match
You’ve probably heard this advice before, but if you’re one of the 20% of workers who don’t take advantage of their employer match, you’re passing up on free money. This is money that could offer you more security in retirement, allow you to take more trips that fulfill your travel ambitions, or permit you to leave a larger legacy behind for your children and grandchildren.
The first step is to discover how your employer match works at your specific company. Some employers match up to 3% of your gross wages if you also contribute 3%. Others match up to 5% or 6%. And some match up to 3% plus additional 50% matches up to 6% of your gross income. It all depends on your specific employer.
Whatever the maximum employer match is at your company, you should be contributing a minimum of that amount of your income to your 401(k) or other employer-sponsored retirement plan. Over time, your employers’ contributions can add up to significant savings.
3. Increase Retirement Contributions By 1% (or More) Every Year
When you start saving for retirement early enough, even saving small amounts every pay period can result in significant savings down the road due to compound interest. But compound interest becomes even more powerful when you’re able to save more.
To truly maximize your retirement savings and build up to the amount you know you should be saving, get into the habit of increasing your retirement contributions by at least 1% of your gross earnings every year. If you can increase your contributions by more than 1%, that’s even better.
4. Max Out IRA & HSA Contributions
You may also want to open an IRA, especially if you’re able to max out the contributions to your employer-sponsored retirement plan. In addition to allowing you to save more for retirement, contributing to a traditional IRA can help reduce your taxable income now. A Roth IRA, on the other hand, can help to lower your tax burden once you reach retirement, which offers a good opportunity for tax diversification.
And if you belong to a high-deductible health insurance plan, an accompanying HSA can offer significant tax benefits as well as even more opportunities to maximize your retirement savings. You can learn more about the benefits of an HSA and how this type of savings account works here
5. Wait Until You’re Fully Vested to Switch Jobs
Most employers implement a vesting schedule to retain their employees before they have full access to employer matching contributions in their retirement accounts. The vesting schedule determines how much time you must work for the company before you can take the matched amount with you when you leave the company.
For the most part, it can be in your best interest to stay at your current job until you fully vest, but there are exceptions to this guideline. For example, if a new position offers a substantially higher salary, it may be worth it to sacrifice your employer matches. Plus, a higher salary allows you to increase your own retirement contributions to make up for the money you’ve left behind.
6. Take Advantage of Catch-up Contributions
When you turn 50, you become eligible to make catch-up contributions to your retirement accounts. For IRA accounts, you can make a $1,000 catch-up contribution every year in addition to that year’s maximum contribution. You can also make an additional contribution of up to $6,500 each year to your 401(k).
If you have the money to make catch-up contributions, you won’t regret saving these extra dollars once you retire. For many people, the ability to make catch-up contributions when they turn 50 allows them to save even more money for 10 or 15 years before they retire. This is especially helpful for individuals and families who had to temporarily reduce retirement savings to raise their children or help pay for college.
7. Invest Wisely
You know the savings in your retirement accounts should be invested, but what should they be invested in? It’s important to understand your risk tolerance and to strike the right balance between risk and return needs, which will change the closer you get to retirement age. It’s also important to invest in securities that have low fees. If you invest in mutual funds or other securities with high fees, those fees could end up eating significantly into any returns you earn.
However, most people aren’t investment experts and don’t always know which decisions are in their best interest. Partner with an advisor like the team at Caviness Wealth Management to receive tailored guidance on the investment decisions that may best align with your unique needs and goals.
Partner With a Financial Advisor Who Can Help
At Caviness Wealth, we know you have big goals for your future that will take careful planning and strategies to get there. We help families nearing retirement to ensure they have a custom plan in place that takes advantage of their opportunities and uses the strategies that will work best for them. To see if we can help your family maximize your retirement contributions, click here to schedule a conversation today.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
