If you are nearing retirement, you probably don’t need convincing that increasing your retirement savings is a good idea. If you had doubts, inflation probably took care of that. When the price of everything goes up now, you start wondering how much things are going to cost when you’re no longer earning income.
While we can all agree that “more is better,” developing retirement savings strategies that work can be challenging.
How to Increase Retirement Savings: 5 Key Strategies
- Prepare for inflation
Too many people settle on a dollar figure to set aside every month for their retirement, rather than a percentage of their salary. That’s a mistake.
Maybe you’re thinking, “I’ll put away $100 every month to go toward my retirement.” That may seem perfectly reasonable if you’re 30 years old, depending on the amount of your income.
A hundred dollars a month is $1,200 a year. If your salary is currently on the lower side of the spectrum, that may be a good start, especially if you have many years until you retire. But if $1,200 is nowhere near 10% of your annual income, you really need to increase your savings rate.
There are two potential problems focusing on a dollar amount as your savings goal. First, you may have picked a number that’s far too low. Historically, conventional wisdom has been that you should save at least 10% of your income a year. Many experts believe that number should be 15% or even more.
Second, inflation will reduce the purchasing power of your fixed dollar savings.
You can use an inflation calculator, to see the erosion in your purchasing power over time, caused by the ravages of inflation.
Here’s an example: If you purchased an item in 2000 for $150, the same item would cost $257.99 in 2022, because of the cumulative rate of inflation during that period (72.0%).
Here’s the bottom-line on retirement savings and inflation: By saving a percentage of your income, rather than a fixed dollar amount, you’re unlikely to be impacted by inflation.
- Increase your savings percentage periodically
If you’re thinking that putting away 10% or more of your salary for your retirement sounds like an impossible goal, you can start off small, such as 4% of your annual income, or if that’s even too much, perhaps only 2%.
Then, every year, add another 1% to your retirement accounts. If you could save 5% of your income toward retirement, and increase that percentage to 6% the following year, and so on, in 10 years, you’ll be putting away 15% of your income.
Here’s a loose guide to follow. Many experts believe you will need to replace 80% of your pre-retirement income.
In order to determine how much you need to save, consider running the numbers, using a retirement calculator.
- Take advantage of employer-sponsored retirement plans
If you work for a corporation, especially one that matches your contributions, you should seriously consider participating in an employer-sponsored retirement plan.
For instance, if you have an employer-sponsored retirement plan at your workplace, like a 401(k), 403(b) or Thrift Savings Plan (TSP), you’ll want to make sure you enroll.
Employer matches vary widely. The most common one is $0.50 on the dollar on the first 6% of pay. For example, if your employer will match 6% of your salary and you make $1500 a week, your employer’s contribution would be $90.00 per week, assuming you contribute at least that amount.
These matching contributions are like getting free money for your retirement.
- Remember that taxes matter
You’ve probably heard the expression [I]t’s not what you make, it’s what you keep that matters.
Tax planning is a critical component of an intelligent strategy to save for retirement.
When you put money into a traditional IRA, 401(k), 403(b) or TSP, those contributions may lower your taxable income, which would mean a lower tax bill that year. You also won’t pay taxes on any money earned from those contributions (such as interest, dividends or capital gains) during the accumulation phase of those investments.
However, once you withdraw money, either voluntarily or through a required minimum distribution, the entire amount of the withdrawal will be taxed as regular income, at your marginal tax rate at the time.
If you put money into a Roth 401(k), you’ll contribute with money that has been taxed, but eligible withdrawals will be tax-free.
There are good arguments for choosing a traditional IRA or Roth IRA or other retirement vehicle, but these decisions have serious tax ramifications. You should be confident your financial advisor has sufficient tax expertise to provide competent tax planning advice.
- The earlier the better
When it comes to saving money for retirement, the earlier you start saving, the better. The longer you wait to start developing retirement savings strategies, time becomes your enemy.
According to Vanguard, if you save only $4500 a year over a 45-year career, you would have $1 million by the time you retire. You could reduce your yearly savings to as little as $2200 if your employer offered a matching contribution.
Small contributions can turn into big savings because of the powerful impact of compounding interest and time, but you need to start early to take full advantage of these factors.
It’s never too late to start saving for retirement. If you are older, increase the amount of your contributions in order to reach your retirement goals.
