It’s like dietary fiber and exercise: We know that saving for retirement is good for us … but it’s just so easy to let slip.
But remember how even small changes to your diet can bring big gains? So, too, can making small tweaks to your retirement savings plan. Even increasing contributions to your 401(k) or Individual Retirement Account (IRA) by just 1 or 2 percent can pay off in a big way. You can thank the immutable power of compounding for that.
Chances are, you won’t even miss it. In fact, a majority of 401(k) participants (87 percent) say they could afford to increase their annual contribution by 1 percent, according to a recent survey by ING Direct. And more than half (59 percent) said they could afford to save 3 percent more.
And saving more for retirement is more critical than ever. The Employee Benefit Research Institute reports that, on average, employees contribute just 7.5 percent of their income to their retirement accounts. But most people need to save at least 15 percent to be on track, according to Vanguard founder John Bogle.
Taking a few minutes to review your retirement savings will pay off in the future. Here’s how to do it:
Pay yourself first. Financial advisors repeat this rule of saving ad nauseam for a reason: it works. Even if it is just a small amount, YOU and your retirement fund are the most important monthly bill you have to pay. Make a point of paying yourself first each and every month. Make it painless by setting up automatic deposits so that you don’t even see it.
Don’t leave money on the table. Save at least enough in your employer’s 401(k) plan to get the company match – which, in essence, is a “guaranteed return” on your investment. Employers typically match 50 cents for each dollar an employee adds to a 401(k), up to 6 percent of pay. Under this matching formula, an employee who earns $50,000 annually and saves $3,000 in the 401(k) plan will get an extra $1,500 from his or her employer as a 401(k) match. You can calculate the impact of increasing your contributions at www.PaycheckCity.com.
Don’t let unemployment derail your plans. Putting your retirement contributions on hold is never a good idea. But what if the slow-to-recover economy has resulted in an unemployed spouse? Although you need qualified income to contribute to a retirement account, there is a provision that allows for a working spouse to contribute spousal IRA contributions on behalf of an unemployed partner. You can contribute as much as $5,000 ($6,000 if you are age 50 or older) on behalf of a spouse.
Consider a Roth. With a Roth IRA you are, in essence, “pre-paying” the tax on some of your retirement. If you don’t touch that money for at least five years and wait until age 59½ or older to begin withdrawals, you will never again have to pay taxes on the balance. It’s an especially attractive option if you are starting out in your career or are otherwise in a low tax bracket and expect to be in a higher tax bracket at retirement.
Look for lower-cost investments. Investment expenses are a drag on returns, so it pays to take a look at the expense ratios on the mutual funds in your retirement account. Even just a 1 percentage point difference in annual fees adds up to $3,380 after 10 years on a $20,000 account balance, according to The RAND Corporation. Currently the typical expense ratio for an actively managed mutual fund is about 1.5 percent, compared to around 0.25 percent for less-actively managed index funds, reports The Motley Fool.
We’ll Help You Get Ready!
Nevada State Bank offers a variety of retirement plan options, including traditional IRAs, Roth IRAs, Timed CDs and Market CD IRAs. Visit our website and find a variety of planning tools, including Retirement Planning Calculators to help you calculate the size of your nest egg.
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