For today’s guest post on saving for retirement, please welcome Danielle Kunkle Roberts from Boomer Benefits.
If you’re already saving for retirement but not where you want to be, now is the time to make positive changes to boost your balance. Even if you feel like you can’t squeeze another dollar out of your budget, there are steps you can take to grow your retirement savings. No matter where you are on your savings journey, these steps will help you reach your goals.
Lower your investment expenses
Most people pay close attention to returns when they choose mutual funds or other investments for their 401(k) or IRA, but few pay attention to how much they cost. An actively managed mutual fund benchmarked to the S&P 500 can cost exponentially more to own than an S&P 500 index fund. The average expense ratio for mutual funds is between 0.5% and 1.0%, although some niche funds and target-date funds can have ratios well above 1.0% Index funds, on the other hand, charge as little as 0.015%.
That may not sound like much, but it adds up to a lot of money over time. If you invest $500 a month in a fund earning 8% a year, you’ll have tens of thousands of dollars more after 30 years if you choose a low-cost index fund over a pricier mutual fund.
Bottom line: It pays to find a good, low-cost stock index fund for all your retirement savings.
Fully fund your health savings account
If you qualify for an HSA, it’s one of the best retirement savings vehicles around. Not only do you contribute pre-tax dollars, but the money grows tax-free, and if you wait until retirement to use it, you pay no income tax. It’s the only savings vehicle that is completely free of income tax if you follow the rules. By comparison, with a traditional IRA or 401(k), your contributions are not taxed, but your withdrawals are in retirement. With a Roth IRA, you pay tax on contributions, but not on distributions.
You don’t pay tax or penalties on withdrawals from your HSA for qualified health expenses, and even after 65, you pay just ordinary income tax for withdrawals for non-medical purposes – no penalty. You can use the money for Medicare premiums or a cruise to the Bahamas if you like. Unspent money rolls over year after year and you can contribute until you sign up for Medicare.
Many people already take advantage of HSAs to offset medical expenses prior to retirement, but if you can fully fund your HSA and pay most of your out-of-pocket costs from your household budget, you have a doubly tax-advantaged asset to use in retirement.
Automate your savings
What you don’t see, you can’t spend, so decide on a savings goal and arrange automatic payroll deductions to meet it. Remember to adjust your savings whenever you get a raise or cost of living adjustment in your paycheck—and time it so the new savings amount applies to your first paycheck at the higher rate. That way you won’t miss what you never had.
Aim to increase your savings percentage by 0.5% a year at a minimum. If you can up your savings rate by 1%, go for it! If you’re saving 15% of your gross income and investing it well, you are well on your way to a prosperous retirement.
Automate your investments—and leave them alone
Commissions and transactions fees are two of the biggest killers of your retirement account returns. The more you buy and sell in your account, the more you lose to unnecessary expenses. Make one fund purchase each time you make a deposit and resist the urge to buy and sell when the market moves. If you’ve done your homework and selected a quality, low-cost index fund or mutual fund, there’s no need to stress over minor market fluctuations.
You may be able to eliminate transaction costs entirely if you buy your broker’s funds. If you open an IRA with Fidelity, for example, you pay no commissions or transaction fees when you buy most Fidelity ETFs and index funds.
Vanguard also offers no-cost funds. This is an easy way to boost your retirement account balance over time. The table below shows the same $500 a month at 8% a year with zero transaction costs versus someone paying $250 a year in trading fees and commissions—you lose over $25,000 by the time you retire.
|10 Years||20 Years||30 Years|
|Zero trading costs||$92,583||$296,974||$750,648|
|25 trades per year at $10 each||$88,397||$283,393||$718,914|
Take advantage of catch-up contributions
You should always “pay yourself first” in your retirement account, but it’s easy to get behind when life gets in the way. If you haven’t fully funded your retirement during any particular year, you can mitigate the damage with catch-up contributions.
Once you turn 50, you can contribute an extra $1,000 a year to your IRA and at 55, you can do the same in your HSA (the figures for 2019). It doesn’t pack quite as much punch as fully funding each year, since you lose out on compound growth, but if you’re approaching retirement, every little bit counts. And if you contribute just $2,000 a year in catch-up contributions to those two accounts, you’ll have $60,000 more in retirement savings when you turn 65.
Saving for retirement is a marathon; lots of tiny steps that lead to your ultimate goal. These tiny steps above won’t really impact your lifestyle today, but they’ll make a huge difference when you’re ready to retire.