It’s never too early or too late to plan for retirement. Whether you just started working or you’re almost ready to retire, there are steps you can take to grow your retirement savings. The earlier you start, the better, but even if you begin saving later in your career, there are still ways you can boost your retirement savings so that you can enjoy a comfortable retirement. Here are some of the best tips and tricks of retirement planning to help you grow your nest egg as much as possible.
1. Start Planning for Retirement Today
The earlier you start saving for retirement, the better. You should start saving and investing as much money as you can now, so it can grow as much as possible before you retire. Most retirement savings plans and accounts apply compound interest, which means your funds will generate earnings that are then reinvested to continue growing. Because of compound interest, investing even a small amount early on can have greater results than investing larger amounts later. For example, if you start your retirement savings at 25 years old and invest only $75 per month, your assets will experience much more growth than if you wait and start investing $100 per month at age 35. At an 8 percent rate of return, the 25-year-old will have accumulated $263,571 while the 35-year-old will have accumulated only $150,030. Investing a smaller amount over a longer period of time can have much better results than investing larger amounts over a shorter time period. For this reason, you should stop delaying and start planning for retirement today.
2. Utilize Your 401(k)
If your employer offers a 401(k) plan and you are eligible, you should contribute to it. A 401(k) plan takes money straight from your paycheck and invests it in a retirement fund. This takes some of the responsibility of retirement savings out of your hands and removes the temptation to spend those funds now. You may be able to choose between a traditional 401(k) and a Roth 401(k). A traditional 401(k) plan allows you to contribute money before taxes, and a Roth 401(k) plan uses income after taxes. To determine which type of plan you should use, consider what your income tax bracket will be when you retire and compare it to your current income tax bracket. If you think you will be in a higher income tax bracket at retirement, you may want to choose a Roth 401(k) so that you can pay less in taxes now compared to how much you would have to pay later. If the opposite is true, you should consider a traditional 401(k).
3. Meet Your Employer’s Match
Many employers offer to match their employees’ 401(k) contributions up to a certain percentage. If your employer offers this benefit, you should take advantage of it and contribute at least enough to receive the full match. For example, if your employer offers a 50 percent match of your contributions for up to 5 percent of your salary, you should contribute at least 5 percent to your 401(k) to take full advantage of the match. With this example, if you earn $50,000 a year and contribute 5 percent, or $2,500, to your 401(k), your employer will contribute an additional $1,250. This is basically your employer adding free money to your retirement savings, so you should take them up on the offer.
4. Establish an IRA
A great way to save and plan for retirement is with an individual retirement account, or IRA for short. An IRA takes the funds you contribute and invests them to grow earnings at a more rapid rate than a traditional savings account. Your 401(k) may not be enough to accumulate all the savings you need for retirement, so you may want to add funds to a separate IRA to further increase your retirement savings. You will have the option of either a traditional IRA or a Roth IRA. Just like with a 401(k), the funds contributed to a traditional IRA are tax-deferred until they are withdrawn, and a Roth IRA is funded with after-tax contributions. If you can, you should try to contribute the maximum amount allowed to your IRA each year to accumulate the most retirement savings possible. This high-growth retirement investment will make a great addition to your plan for retirement.
5. Use Catch-Up Contributions If You Are 50 or Older
Yearly contributions to 401(k) plans and IRAs are limited, and this is one of the reasons why it’s so important to start planning for retirement early. However, if you didn’t start your retirement planning until later in your career, don’t worry. The year you turn 50, you can start contributing more beyond what the normal limits allow through catch-up contributions. If you are over 50 years old or turn 50 in 2020, you will be able to contribute an additional $1,000 above the $6,000 limit to your IRA this year. Also, if you turn 50 in 2020 you will have a catch-up contribution limit of $6,500 above the $19,500 limit on your 401(k) plan. These extra contributions can help you save more money as you get closer to retirement.
6. Automate Your Retirement Savings
A great option to make planning for retirement easier is automating your retirement contributions. You can set your retirement contributions to be automatically taken from your paycheck or bank account each month. This helps take away some of the stress of retirement planning because you don’t have to think about it or worry that you will forget to contribute to your retirement plans and accounts.
7. Take a Close Look at Your Spending
You can only save and invest money that you don’t spend. When you want to plan for retirement and build up your retirement savings, you may need to rein in your spending so that you can afford to do so. Take a close look at your budget and see where you can cut back on where your money is being spent. One great way to reduce expenses is by bringing your lunch to work so that you don’t have to buy it each day. Figure out other areas where you can cut back on your expenses so that you can put more money away as you plan for retirement.
8. Set Goals for Yourself
When you are planning for retirement, it is important that you set goals. If you know how much money you want to have when you retire, then the process of saving and investing money now will be much easier and will feel more rewarding. You should also set benchmark goals along the way to ensure you stay on track to reach your retirement savings goal. Achieving these benchmarks will provide satisfaction that you are, in fact, making progress and will keep you working toward your ultimate goal.
9. Save Your Extra Money
If you have extra money left over after you pay your expenses and make your contributions to your retirement funds, save it instead of spending it. Each time you receive a raise, you should increase your contribution percentage to match your increase in income. It is recommended that you dedicate at least half of your new money to your retirement savings, since you haven’t been dependent on this money and probably don’t need it to live. Also, extra funds from a tax refund, salary bonus, or other sources can be used to make additional progress toward your retirement goal. Don’t use all of the extra money to splurge on a gift for yourself; instead, buy yourself a small treat and invest the rest in your retirement. Saving as much as possible now will make your future retirement much more enjoyable.
10. Consider Delaying Social Security as You Approach Retirement
For each year you delay receiving Social Security payments before the age of 70, you can increase the amount you will receive in future years. You are able to start receiving Social Security payments at age 62, but for each year you wait, up until the age of 70, your monthly benefit amount will increase. This additional income can really add up and make a big difference, even if you just push retirement back one year. Additionally, delaying your Social Security payments can increase potential future survivor benefits for your spouse. As you plan for retirement, you may want to keep this in mind and push back your retirement so that you can receive additional money in the future.
Retirement Planning with the Help of a Knoxville CPA
It’s important to begin planning for retirement as early as you can, so get started now. As you start retirement planning, you need to find out what your current expenses are so that you know how much you can afford to save for retirement. If this seems a bit overwhelming, you may want to consider enlisting the help of an accountant. An accountant can help you figure out how much you’re spending and how much you must pay in taxes so that you can know how much you have left over to put towards your retirement savings.
Here at Lawhorn CPA Group, our team of experienced accountants can guide you through figuring out your expenses and taxes as you plan for retirement. In addition to accounting and tax planning, we also offer retirement and financial planning services. We will analyze your projected income and expenses to help you come up with a strategy for ensuring the security of your financial future. We work with local professionals who will guide you with investment funding and retirement planning techniques that can give you the security of knowing your retirement will live up to your expectations. To enlist the help of a Knoxville CPA, reach out to us today online or by calling 865-212-4867.