Saving for Retirement—How’s That Working Out for You?
For some the answer is, very well, thank you. For others, there may be plenty of room for improvement. There is no better time than National Retirement Security Week (October 21 - 27) to start saving in earnest, to keep on growing your nest egg or to make some positive adjustments to your existing retirement savings game plan.
Here are four solid tips to make retirement saving work out for you.
1. Start saving specifically for retirement. This tip is especially directed at young workers. Any amount you save at a young age can pay huge dividends down the road through the power of compound interest. A 22-year-old who saves $200 a month—just about $50 a week—at a 6 percent annual rate of return will have more than $76,000 saved towards retirement at age 40. That puts you well ahead of the $54,054 that is the average level of savings for those aged 35 - 44, according to Vanguard’s How America Saves
Any amount you save
at a young age
can pay huge dividends
down the road
through the power
of compound interest.
How to do it: Enroll in your company’s retirement savings plan, if you have one. Make a call to your organization’s Human Resources department to get the ball rolling. Make sure you contribute at least enough to take full advantage of any company match that might be offered. No company plan? Open an IRA, which you can often do in a few minutes with a simple phone call. Set up automatic contributions so that you are contributing each month, or with each paycheck. Both IRAs and employer-sponsored 401(k)s or similar plans provide tax advantages designed to encourage retirement savings (and discourage early withdrawals), so that’s where you should begin.
2. Give yourself a savings "pay raise" each year. Your savings target should be around 12 to 15 percent per year, inclusive of any employer match. You may need to work up to that amount over the course of a few years, escalating the amount you save by a percentage or two each year. But the earlier you lock in that double-digit savings rate the rosier your retirement balance sheet is likely to be.
How to do it: Some organization’s offer automatic escalation, where your retirement savings increases each year unless you opt out (don’t). Others remind you of the option to escalate, often during annual enrollment for other benefits (act on that company nudge). If either of these is not an option, set up a calendar reminder each year to increase your savings rate. Some savers like to time their savings “raise” to kick in at the beginning of a new year, perhaps to coincide with a rise in salary, or during benefits open enrollment. You can also enlist a spouse or friend to keep each other on the retirement savings track. The key is to follow through. Don’t over think the increase—after all, you’re just paying yourself more each year.
3. Don’t stop saving for retirement just because you reached an IRS limit. IRS retirement contribution limits are not guidelines for how much you should save. While an admirable first step, saving the IRS maximum may not ensure you meet your retirement goals. This is especially true if you are saving through an IRA, which has a maximum savings limit is $5,500 per year, or $6,500 if you are 50 or older. Unless you supplement this amount with other savings, your nest egg may fall short of what you need to enjoy a secure retirement.
How to do it: Set up a separate account for retirement savings and earmark it for that purpose. Set up automatic payments to that account, just as you do with tax-advantaged accounts. Consider discussing ways to enhance your retirement savings with an investment or tax professional.
4. Evaluate Investment Fees. Investing is never free. There are a number of fees that may apply to different types of accounts, and those investment fees can have a surprisingly large impact on your returns. It’s a good idea to conduct periodic check-ups on your financial accounts to ensure your money isn’t slowly being eaten away by high fees.
Here’s how: You may not have much power to control the fees in an employer-sponsored retirement plan, but you often can control which funds you select. Find out how much each fund charges in annual expenses. This information is found in the fund’s prospectus, or you can call the fund or plan administrator to find out. As a general rule, you pay more for a managed fund than for an index fund. It may be possible to select lower-cost funds that allow for appropriate diversification and asset allocation. FINRA’s Fund Analyzer can help you get a handle on fees by allowing you to compare over 18,000 mutual funds and exchange-traded products.
To learn more about saving and investing, and keeping your finances in order, visit the Investors section of FINRA.org.