Most of us understand the benefits of saving for retirement
starting early. Compound interest, in which interest earns interest on itself
and causes a snowball effect, can work wonders for retirement savings. But
let's face it: For a lot of people, it is not realistic to prioritize
retirement savings earlier in their careers.
During the early stage of our careers, we have many
competing goals, like purchasing a home, saving for children, traveling, or
paying off debt. With so many different goals competing for cash within a short
timeframe, it can be challenging to prioritize retirement savings. If you
haven't managed it yet, don't worry — you can still get starting saving later
in life.
As a financial planner, I can tell you there are eight ways
for you to supercharge your retirement savings when starting later in life.
1. Build your emergency fund
First things first, you will need to build a sufficient
emergency fund. This fund should be able to cover your expenses for three to
twelve months depending on multiple risk factors.
It is best to keep this fund in a high-yield savings account
or money market account where you will have easy access to the funds for
emergencies. You want to keep this money as liquid as possible. That way you
won't have to tap into your retirement savings or other investments to cover
emergency expenses.
2. Max out your employer-sponsored retirement account
In most cases, a 401(k), 403(b), or employer-sponsored
retirement plan is the easiest way to start saving for retirement. The first
action to take with these plans is to take advantage of any matching
contributions that your employer offers. This match is a guaranteed return on
your investment.
The contribution limit for 2022 is $20,500, or $27,000 if
you are age 50 or older. Contributing the maximum allowed to your
employer-sponsored retirement plan will enable you to supercharge your
retirement savings, while saving on taxes.
Similarly, if you are self-employed, you can explore
retirement options such as the solo 401(k), SEP IRA, and SIMPLE IRA.
3. Max out a Roth IRA
Opening a Roth IRA is a great way to create flexibility
during your retirement years. With the Roth IRA, you contribute to the account
using post-tax dollars and the account grows tax-free.
Then, when you take money out of the Roth IRA during
retirement, you do not have to pay taxes. After contributing enough to your
employer-sponsored retirement plan to receive any match, consider maxing out
contributions to a Roth IRA. The contribution limit for 2022 is $6,000, or
$7,000 if you are age 50 or older.
Keep in mind that Roth IRAs have an income limitation. Make
sure you confirm that you are eligible before contributing.
4. Max out an HSA
If you have a high deductible health plan (HDHP), check to
see if you are eligible for the Health Savings Account (HSA). HSAs are
tax-advantaged, meaning that you can make contributions to the account with
pre-tax dollars.
HSAs are triple tax-advantaged if you use the funds for
qualified medical expenses. Not only can you make contributions with pre-tax
dollars, but also the account grows tax-free and can be withdrawn tax-free for
qualified medical expenses.
The contribution limit for individuals in 2022 is $3,650
($7,300 for families) or $4,650 ($8,300 for families) if you are age 55 or
older.
When planning for retirement, you must consider the cost of
healthcare. We are living longer, and healthcare costs are becoming more
expensive. In retirement, your HSA can be used as a dedicated pool of money to
be able to pay for medical expenses.
5. Get rid of high-interest debt
In most cases, paying off high-interest debt will provide
the best return on your money. The average credit card interest rate in 2021 is
around 16%. This is by far much greater than the historical 7% average annual
stock market return rate.
So, with a $100 investment, paying off the credit card would
save you $16, versus putting that same money in the stock market, where it
would only earn you $7.
6. Watch out for lifestyle inflation
As your income increases, it is very important to limit
lifestyle inflation. Consider creating a zero-sum budget where every single
dollar earned is assigned a job, whether that's going into savings, paying
debt, paying bills, or treating yourself here and there.
Make sure you prioritize retirement savings within your
budget, and automate them. Automation — sending the money into savings straight
from your paycheck or your checking account — will help you avoid the
temptation to spend that money on something else instead. Most people who
automate their savings forget about the money, and don't even miss it.
7. Create multiple streams of income
With less time for compound interest to work to your advantage, it is important to
save more aggressively towards retirement.
If you find yourself behind, consider your options for
earning extra money through side hustles. You can use this extra money to max
out your employer-sponsored retirement plan, Roth IRA, HSA, or consider
investing in a taxable brokerage account.
8. Be a little aggressive with your investments
To meet your retirement goal, it is likely that you will
have to take on more risk to achieve the return needed.
If you are in your 30s or early 40s, you still have lots of
time to save and invest towards retirement. You have room to be a little
aggressive with your investments, if you can tolerate it. With a late start to
saving, you will want to participate in the growth of the market. Consider
dollar-cost averaging your money into the market to keep things simple.
Whether you are just finishing college, or approaching your
40th birthday, you will have time to save towards your dream retirement. You
must make yourself a priority. Create a flexible budget that prioritizes saving
for retirement before discretionary expenses. The earlier you start planning
for your retirement, the sweeter it will be.
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