Financial Answer Center
- Retirement: A Lifestyle Choice
- Myths of Retirement Planning
- Retirement Sources of Income: The Three-Legged Stool
- The Case for Pre-Tax Savings
- Basic Retirement Guidelines
- Inflation: The Incredible Shrinking Monster
- Big Picture Preview
- Calculating Your Personal Retirement Assets
- Beyond the Basics: Bulletproofing Your Savings
- Saving More for Retirement
- Making Up the Shortfall
- Simple Tax-Advantaged Planning Strategies To Consider
There are things you can do to save more for your retirement. Consider four basic strategies:
Rearrange Your Priorities
Pay yourself first. You may feel that you're not doing the right thing or it may be selfish to put yourself before saving for your children's college education, among other things. However, it is critical that you save for retirement first. Take advantage of all company retirement plans and other tax-free or tax-deferred retirement accounts.
Reduce Spending and Increase Your Savings Rate
If you're not planning on earning more money, the only way to increase your saving contributions is by cutting expenses. See how much more you'll have in retirement savings if you increase your annual contributions by just 1%.
Say a co-worker of yours earns $35,000 per year and plans to retire in 20 years. He currently deducts 7% from each paycheck to go into his company savings plan. So each year he contributes $2,450 to his plan. If he earns a 7% average annual rate of return on his savings, he will accumulate almost $101,000 by the time he retires. Now assume he increases his annual contribution by just 1%. That brings his annual contribution up to $2,800—another $350 per year. At the end of twenty years, he will accumulate $115,000—an increase of $14,000 or 14%—just by increasing his contribution $1 per day.
Look at the following table to see another example of the dramatic long-term results of increasing your annual contributions.
|
Comparison of 401(k) Contribution Percentages and Value of Account at Retirement* |
|||
|
Annual Contribution |
Monthly Contribution |
Total Lifetime Contribution |
Value at Retirement |
|
2% |
$66.67 |
$20,000 |
$54,000 |
|
4% |
$133.33 |
$40,000 |
$108,000 |
|
6% |
$200.00 |
$60,000 |
$162,000 |
|
8% |
$266.67 |
$80,000 |
$216,000 |
|
10% |
$333.33 |
$100,000 |
$270,000 |
|
12% |
$400.00 |
$120,000 |
$324,000 |
*Assumes a salary of $40,000, 25 years to retirement, and a 7% annual rate of return
Change Your Investment Mix
Most Americans are too conservative when it comes to investing their retirement assets. Fixed interest accounts and guaranteed investment contracts are popular investment choices, but they may not give you a rate of return that will keep you well ahead of inflation. In fact, this type of investing for "safety" is really a risky strategy. The key is to have your retirement assets stay ahead of inflation by at least 3%.
Consider Postponing Your Retirement Age
You may just need more time to save. Not only are you getting a chance to save more, chances are your earnings will increase, too. This could lead to increases in your pension and may also mean a higher retirement benefit from Social Security. Social Security will take into account your higher earning years, so you get a double boost from postponing retirement if your earnings go up. However, you should avoid overexposure to risk in your investments, particularly as you near your postponed retirement.
You may still not have saved enough for your retirement. There are different strategies for making up the shortfall, depending on your age. You also need to understand some tax-advantaged planning strategies that will help you save more.
