With longer predicted life expectancies, a roller coaster stock market, and more pending job losses, it’s more important than ever to find ways to boost your retirement savings now. Although there may be many obstacles to doing so, even just the few simple tactics outlined here can go a long way to increasing your bottom line at retirement.
Take Advantage of Your Employer Match
If you work for an employer that offers a matching incentive in your retirement plan, take full advantage of it. After all – it’s like getting tax free money! Even a match of a few hundred dollars per year can add up over time thanks to the magic of compounding. For example, if an employee contributes 6% most companies will match half the contribution which equates to a 3% match or 9% in total. For an employee earning $50,000 per annum on average over a 35 year career, the extra 3% match is equal to a whopping $207,000 (assuming a 7% return) at retirement.
Maximize Your Retirement Plan Contribution
Provided your employer offers a retirement plan such as a 401(k), consider increasing – or even maximizing – your contributions (2010 Limits are $16,500). This can help you now by reducing taxable income, and will also result in more dollars going towards tax free compounding. By forcing yourself save now you will save yourself plenty of financial hardship in the future.
Convert to a Roth IRA
If you have funds in a traditional IRA account, you may want to consider converting them to a Roth IRA . Starting this year the prior income test of $100,000 for converting a regular IRA into a Roth IRA does not apply. And, you will further benefit because any conversions that that take place in 2010 will be allowed to have half of the taxable amount converted taxed in 2011, and the other half taxed in 2012. Get more details here.
Make Sure the Mutual Funds in Your IRA are Best in Class
If you have money to invest – and especially if you’ve lost money in the recent down market – do your homework and make sure that all future investments have high ratings from a mutual fund rating service such as Morningstar. Even though past performance is no guarantee of future results, a good rating is still a good indicator that the fund is well managed and has a positive past track record. You should also use the Morningstar X-ray screener to check your portfolio diversification and get suggestions on how to better allocate your portfolio.
Invest in Stocks via your IRA to Boost Returns
Although many people are somewhat leery about getting back into the stock market, now could be a great time to do so. Many good solid company’s stocks are trading at well below value. This means that you could have the opportunity to purchase quality companies at a discount. Some companies allow their employees to purchase company shares at a discount and include these in their retirement portofolio. So if you believe your company has great potential then this could be a great way to put some of your money (not all!) into your company’s shares using pre-tax dollars.
Buy Disability Insurance
Even though insurance is not considered an investment as such, it could actually be the best way to protect your investments. And in the case of disability insurance, it is also a way to protect your ongoing income (even into retirement)
If you were to ask a group if people what their most valuable asset is, you will likely hear a variety of answers that include things such as their home, their 401(k) plan, or their business. But the truth is that your most valuable asset is your ability to earn an income. Without that, most of your other assets would be impossible to purchase or maintain. Therefore, protecting your income with disability insurance could be the most important investment protection you can buy now and into retirement.
We’ve all heard the expression, “It’s not how much you make, it’s how much you keep that matters.” This is very true! If you make $1 million, yet you spend even $1 more than that, you will be in the red.
Therefore, watch your expenses. It may seem like common sense advice, but it’s amazing how many people spend more than they make. Over time, this can add up to large amounts of debt that can literally spiral out of control.
Some things you can do to reduce your expenses include paying off high interest debt, evaluating your housing expenses, and even cutting out unnecessary costs such as premium cable channels.
Have an Emergency Fund
This, too, may sound like “Savings 101,” but far too many people go through life without an emergency fund. When an emergency comes up, unfortunately they must dip into their retirement savings to pay the costs. In doing so, this can truly affect your long term retirement income.
In order to avoid dipping into retirement savings, strive to have between three and six months of living expenses saved in an account that you can easily get to in case of emergency. This will help you in case the unexpected comes up, while keeping your long term savings intact.
Contribute to a Health Savings Account
Many people are using their Health Savings Accounts as a way to supplement their retirement income. With an HSA, you can pay for health related expenses, as well as use the account to save for future medical expenses, health insurance premiums, or premiums for Medicare.
Once you reach age 65, distributions from an HSA for non-medical expenses are taxed as ordinary income. And, unlike your IRA account, there are no mandatory age related required distributions. Therefore, your HSA account can continue to grow indefinitely.
Pay Yourself First
Although it may be difficult to comprehend, paying yourself first is more important than any other bill or debt you may owe. And although you do not want debt to spiral out of control, you must make a point of paying yourself first each and every month. Even if it is just a small amount, YOU and your retirement fund are the most important monthly bill you will ever have to pay.