Max out your retirement savings with these 7 tips
I‘ve often wondered if the Apostle Paul was bad with his money. Yes, I’m talking about the guy that wrote most of the New Testament. In his letter to the church in Rome, Paul lamented that the things he wanted to do he doesn’t, and the things he hates to do, he does. My mom had her own translation of Paul’s missive–the road to hell is paved with good intentions.
And that brings me to retirement savings. In the 12-month plan to revitalize our finances, I listed maxing out your retirement accounts as the goal for January. Of course, everybody knows they should max out their retirement savings. But knowing we should do something and actually doing it are two totally different things. I guess not much as changed in the 2,000 years since Paul wrote his famous epistle.
So today we are going to look at seven practical tips and tricks to help you do what you already know you should–contribute the maximum amount to your 401(k), IRA, and other retirement accounts.
1. Start: Starting to save for retirement is like jumping into a cold pool for a morning swim–just do it. Once your in, the water warms quickly. With a 401(k), you can save very small amounts each month to start. Even if you can only afford $25 a month, start right now. Not tomorrow. Not next week. Today.
And for an IRA, you can start saving just $25 a month with Betterment. With Betterment, you can set up a diversified account in just five minutes. I know, because that’s exactly what I did. And if you start with $250 in your account, Betterment gives you a $25 bonus. There’s no excuse. Just do it.
2. Keep it Simple: I’ve talked to a lot of people who are afraid of investing in the stock market. And their fear keeps them from contributing to a 401(k). Don’t let your fear dictate your actions. Every 401(k) plan I’ve ever seen offers well diversified mutual funds. Most offer funds designed to be a complete solution to retirement savings. Called target date funds, you can pick a fund based on when you retire. It’s that simple. And if you have any questions, the company that manages your 401(k) plan can help.
3. Avoid Roth 401(k) and IRAs: Let me first say that Roth retirement accounts can be a great way to save for retirement. But if you are really stretching your money to save for retirement, they may not be the best choice. With a Roth 401(k) or Roth IRA, you don’t get an immediate tax benefit. With a traditional 401(k) or deductible IRA, taxes on your contributions are deferred until you take out the money. The tax savings you’ll enjoy can really help if you are on a tight budget. And you can always convert to a Roth 401(k) later.
4. Save 50% of Raises: Each time you get a raise, increase the amount of your retirement savings. An increase equal to 50% of your raise is a good place to start. And if you are contributing to a traditional 401(k), remember that you still get a tax break on the contribution, so it won’t hurt as much as you may think.
5. Automate: All 401(k) plans that I’ve ever seen automatically take your contribution out of your paycheck. Not all IRA accounts, however, are automated. I’ve automated my investment account with Betterment, which takes out $100 every month from my savings account. Soon you won’t even miss the money. In my case, my Betterment account is now near $2,000, and the automation is a big reason why.
6. Get Help: If your employer matches some or all of your contributions, be sure to take advantage of this help. Employer contributions, however, kick in only if you are contributing to your 401(k). So don’t turn this help away. It may take you some time to maximize your contributions to take full advantage of your employer’s match, but use this benefit as motivation to save as much as you can.
7. Cut Back Without Sacrifice: All the tips above are of no use if you truly have no money left at the end of the month. If that’s you, read my book, 99 Painless Ways to Save Money. It’s a free eBook that is packed with tips and tricks on ways to save money without sacrificing your lifestyle. And if you don’t feel like reading an eBook, at least check out 55 Painless Ways to Save Money. Following even a few of these tips can easily free up enough money to start saving for your golden years.
Published or updated January 16, 2013.