Strategies for Maximizing Your Retirement Savings
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You're not alone if you had to cut back on retirement savings contributions in the last few years to deal with job loss from the coronavirus pandemic or rising inflation. The savings rate of Americans has decreased precipitously since 2020 — which makes 2024 the year to start maximizing your savings to make up for lost time.
Whether you’re close to retirement age or are decades away from retiring, it’s important to work on your retirement plan and define your retirement goals sooner than later. This is because contributing to your retirement account today could equal free money later in life, giving you the nest egg you need to thrive in retirement.
From diversification strategies to how much to contribute to your employer plan, here are ways to maximize your retirement savings in 2024.
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The importance of saving for retirement
While everyone has different investment objectives, it’s important to save for retirement. While your social security benefits will help with some retirement income when you retire, they will be hard to live off alone — especially with factors like inflation and the cost of living rising in many areas.
As such, it’s important to explore various investment options and make a plan so that your retirement distributions are enough to provide for the life you want in retirement. Keep reading for some tips on how to start maximizing your retirement savings in 2024 and beyond.
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Get started — earlier is better
It can be easy to kick yourself for not getting started earlier on your retirement savings. However, anyone can feel that way since the conventional wisdom when saving for retirement is that the best day to start was yesterday.
Even so, starting your savings plan now is better than waiting a month or two, thanks to how compound interest rates wind up, allowing your savings to grow exponentially over time. If you feel like you missed the boat and are older than 50, you can make catch-up contributions to your 401k Roth IRA or traditional IRA.
If you can make up catch-up IRA or 401k contributions and aren’t happy with how the math is working in your favor, this can be incredibly advantageous to start doing the day you turn 50. For example, while your 401k contributions are capped annually at $23,000 in 2024, you can contribute an additional $7,500 if you’re over 50.
The power of compound interest
Whether contributing to a Roth 401k, Roth IRA, 401k, or traditional IRA, compound interest is one of the biggest reasons to start saving early. With compound interest, your principal investment grows exponentially since the interest accrued is lumped in and earns interest.
For example, let’s say you invest $10,000 today and continue investing an additional $250 a month until you retire 25 years from now. At an estimated interest rate of 4% and annual compounding, you will have a total of $151,596.09 — and will only have invested $85,000.
Using that same math, if you had started investing five years earlier, your savings would be upwards of $200k! Use that math as motivation to open a retirement account today, no matter how small your principal investment and monthly contributions are.
Leverage tax-advantaged retirement accounts
Contributions are made before taxes are taken from your pay when contributing to a tax-advantaged retirement account. This allows you to save more with pre-tax dollars and in some cases, can even help you reduce your tax burden for the year by reducing how your income taxes are calculated with certain tax deductions.
Beyond allowing you to save more, tax-advantaged retirement accounts may also mean that you owe lower taxes on the money you withdraw post-retirement since your tax bracket may be lower when you supplement your living expenses with retirement distributions instead of earning a salary or hourly wage.
Types of tax-advantaged accounts
While all tax-advantaged accounts offer tax breaks differently, some nuances exist. Here are some of the most common tax-deferred and tax-free investment vehicles to help you save for retirement.
401(k) plans
These are the retirement accounts your employer offers, and sometimes even come with an employer match on contributions up to a certain amount. Contributions are made with pre-tax dollars, which helps to lower your annual taxable income.
Individual Retirement Accounts (IRAs)
These are retirement accounts that you open yourself: a traditional IRA or a Roth IRA.
In a traditional IRA, your contributions are tax-deductible, so you don’t pay taxes until you withdraw.
In a Roth IRA, your contributions are made with after-tax dollars. This means that since you’ve paid taxes “up front,” you don’t pay taxes on any withdrawals you make from this account in retirement.
403(b) plans
403(b) plans function identically to 401(k) plans, except those offered by businesses classified as non-profit organizations.
Simplified Employee Pension (SEP)
If you are a small business owner or are self-employed, a SEP is similar to a 401(k) account and allows you to make contributions with pre-tax dollars.
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Use your employer’s savings accounts if available
There’s nothing wrong with setting up your own IRA with one of any number of brokerage accounts. Still, if your employer offers a 401k or other savings accounts like a health savings account (HSA), these are also helpful tools for maximizing your retirement savings.
For example, if you contribute to an HSA, you can stretch your pre-tax dollars further by not having to spend as much money out of pocket for medical expenses. This frees up more of your budget for investing in target-date or mutual funds to help build your nest egg.
Another reason that it’s a good idea to contribute to your employer’s 401k because you can often get a match from your company. For example, some companies offer matches up to a certain contribution level. That might mean that every dollar up to 3% of your paycheck gets matched by your business, boosting your bi-weekly contributions to 6% of your salary.
Generally speaking, unless you are trying to pay down debts aggressively, it’s best practice to contribute the maximum necessary to get your employer matched. If you aren’t doing that, you’re leaving money on your table — and compound interest can turn that money into something if you stay at the same company for years.
Diversify your portfolio
When it comes to saving for retirement, asset allocation is an important consideration. By diversifying your portfolio, you can spread out where your money is being invested, which, in turn, can minimize your risk by keeping you from putting all of your eggs in one basket.
Of course, depending on your risk tolerance, you may not need to diversify across stocks, bonds, mutual funds, and other investment vehicles since not all have the same upside. While diversification is important when seeking a stable investment portfolio, you may want to go more all-in on certain investment options if you are younger and riskier.
As you get closer to retirement age, however, it makes sense to get more conservative in investing and even consider taking out a fixed-rate annuity if you want a guaranteed rate of return. This is so that you don’t lose a huge portion of your investment portfolio right before you need to start tapping it for income in retirement.
Minimize fees
There’s a great debate about whether or not you should use a financial planner. Some people get a lot of peace of mind by using an expert to help them navigate the complexities of their savings and retirement goals. However, others don’t want to give away a percentage point of their retirement income.
1%—or even .5%—may not seem like a lot of money when earning tens of thousands of dollars each year in compound interest. Even so, when you run the math, you see that fees can quickly eat up your earnings and cut into your portfolio’s gains.
For example, if you’re investing $10,000 with additional contributions of $250 a month over 20 years, you’ll have contributed $70,000. With a conservative rate of return of 4% compounded annually, that investment would become roughly $111,000. However, if you “give up” 1% of that to a financial advisor or in other fees, you’ll only earn $98,000, meaning you’re losing $13,000.
Some other common fees to be on the lookout for when trying to maximize your retirement savings include:
- Account maintenance fees: some 401ks or IRAs charge annual maintenance fees, ranging from a few dollars to hundreds of dollars, depending on the savings of your portfolio and the brokerage.
- Expense ratios: ETFs and mutual funds can charge up to 2% to manage these investment vehicles.
- Transaction fees: Fees are charged any time you buy or sell shares of a certain investment.
Ultimately, whether or not you choose to use a financial is up to you. However, if you use one, it becomes even more important to be mindful of the other ways you could lose money with your retirement account over time.
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Monitor your accounts
As you age, checking your account is a good idea. While automatic investing allows you to “set it and forget it” when it comes to your portfolio, at the same time, it’s critical to keep an eye on how your retirement account is performing.
Some investment brokerages even have online calculators to help estimate how much money you’ll have in retirement. This can be a great way to determine if you have enough to live on based on your current budget and how you may expect your expenses to change financially over time.
When considering the money your future self might need, go further than groceries and utilities. Ask yourself the following questions to ensure that you’re dialed into the kind of retirement you want to have and need to be able to afford:
- When do I want to retire?
- What kind of lifestyle do I want in retirement?
- What are my current sources of retirement income?
- What sort of investment return am I expecting?
- Will I be able to handle any unforeseen medical expenses?
- Can I adjust my lifestyle to live on less if I don’t meet these savings goals?
Keep in mind that just because your portfolio might be down a certain month, you should still stay the course and keep investing. Market fluctuations are normal, and it’s important not to make any knee-jerk reactions since they could have major repercussions later down the line when you need retirement income.
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The bottom line
Saving for retirement is a critical part of your finances and, sadly, something many people don’t think about until too late. Getting a head start on your investment portfolio and retirement savings today can be one of the most important things you can do for your future self. Thankfully, it’s relatively easy online and can be done in under 20 or 30 minutes.
While it can be stressful to think about how time and fees are eating up the life you’re planning for your future self, use those as motivators instead of reasons not to begin. By thinking clearly and considering your needs and what is most likely to happen to you later in life, you can work towards a plan that ultimately offers you the life you want to lead in retirement.
Retirement can be wonderful, but only if you can afford it! Use the above tips and strategies to dial in your retirement accounts and work towards the retirement you’ve always dreamed of.
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Writer
Brent Ervin-Eickhoff is a Chicago-based writer, stage director, and filmmaker with a background in digital marketing and content creation. In addition to Joy Wallet, Brent has written for Complex, Volkswagen, HowlRound, Picture this Post, and Third Coast Review, among others. He currently serves as the Associate Director of Marketing for Content Creation at Court Theatre at the University of Chicago. Brent graduated from Ball State University with Academic Honors in Writing.
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