Saving for retirement is a crucial financial strategy that helps build a safety net for the future and ensures essential expenses are covered after retirement. The best approach is to start early, ideally in one’s 20s, to benefit from compound interest over time. But, with student loans, daily expenses, and family commitments, this becomes challenging. Even if one starts to save later in life, there are several ways to maximize contributions.
Tips to build a retirement savings plan
1. Determine the amount to be saved for retirement
The amount one must set aside for retirement typically depends on several factors, such as one’s situation, lifestyle, and post-retirement obligations. It is ideal to have a monthly retirement income that amounts to 70% to 80% of the earnings from one’s last job.
2. Figure out a monthly savings rate
The more one saves every month, the more money there will be for retirement. Typically, a financial cushion of around $1 million is recommended. But this can change based on inflation and one’s lifestyle. Having a goal makes it easier to plan for retirement or to calculate the amount that needs to be set aside monthly or annually. If the retirement goals seem challenging to meet, one can change one’s strategy by increasing one’s monthly savings rate.
3. Take the 401(k) or 403(b) matched by company
When looking at ways to build a retirement fund, consider taking advantage of employer-sponsored plans. Ideally, an employee should contribute the same amount the employer does. In order to get the maximum benefit, one can contribute the maximum amount that is permissible by law to the retirement savings plans. Starting as early as possible can lead to maximum benefits. For instance, consider an employee who earns around $50,000 yearly and whose employer has contributed about 5% of the salary to match the amount the employee had put in the company’s retirement account. This way, if the employee invests around $2,500 into their 401(k), they will automatically get a bonus of about $2,500 from the employer. This is in addition to the other tax benefits and rebates.
4. Contribute to Roth IRA
When planning for retirement savings, many people compare 401(k) vs. IRA to determine which is better for retirement. Both have their own advantages and meet different requirements. For starters, 401(k) is offered only by employers. Roth IRAs are held by investment or brokerage firms. But, some employers can offer a Roth version of the 401(k), which has the same tax rules as the Roth IRA. Employed individuals can opt for both types of retirement plans as long as they meet the qualifications of both options and meet the income and contribution limits. Roth IRAs are more suitable for freelancers, self-employed individuals, and even small business owners who want to plan for retirement. A Roth IRA account has to be opened by the individual themself. There are no upfront tax deductions involved in saving money. So whenever money is withdrawn from this account after retirement, no taxes are owed if the individual meets a few eligibility criteria. This means there is no income tax imposed on the investment gains.
5. Claim for double retirement plan contributions
A useful retirement savings tip for beginners is to contribute double their contributions to retirement plans. This is especially applicable to teachers, public sector employees, and nonprofit employees. There are a few catch-up provisions that provide the opportunity to get benefits for double contributions to retirement plans. Participants of plans like 457(b) and 403(b) plans can sometimes take advantage of these provisions, depending on their eligibility. The updated and latest details for these can be found on the official website of the Internal Revenue Service or IRS.
6. Increase savings using a backdoor Roth IRA
For most people, the contributions start to dwindle down for Roth IRAs depending on the income and filing status of the individual. So, there can be situations where one’s present income is too high, disqualifying them from contributing to a Roth IRA. In such cases, one of the best investment strategies for retirement savings is to contribute to a traditional IRA account. With a non-deductible conventional IRA, there are no income caps for contributions, even if there is a limit to the total contributed amount. Once the funds in the IRA account have been cleared, the IRA account can be converted to a Roth IRA. This way, the money will continue compounding for the future, and one can withdraw it by paying additional taxes after meeting the withdrawal criteria.
7. Retire in the right state
When thinking about how to retire early with smart saving strategies, consider retiring in a state that has no state income taxes. Alaska, South Dakota, Florida, Wyoming, Tennessee, Texas, Washington, and Nevada are some of the states that do not impose state income tax. New Hampshire, too, does not impose any tax on earned income, but the state taxes interest and dividends. Also, for retirees, there is no tax on Social Security in most states. But if they plan to relocate to a new state, they should evaluate all the taxes in the new home state.
