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How to Ace Retirement

4 min read

30 sec brief

Hatching a successful retirement plan can be tricky. After all, it’s one of the biggest delayed gratification challenges you will ever face as decisions you make today won’t pay off for decades.

Hatching a successful retirement plan can be tricky. After all, it’s one of the biggest delayed gratification challenges you will ever face as decisions you make today won’t pay off for decades.

Nail a few key steps right now and you will do yourself a serious solid that will land you in retirement in great shape.

Don’t Wait. The sooner you start to save, the more you can rely on compounding to do the heavy lifting for you. Let’s say you sock away $500 a month starting at age 30. You will have $1.3 million by age 70 assuming a 7% annualized rate of return. If you wait until age 40 to get started, you will have $610,000 by age 70. Sure, you invested more by starting at 30 –$240,000 in total contributions vs. $180,000 if you started at age 40 – but that extra $60,000 in contributions nets you another $700,0000 in retirement savings by age 70.

Aim to save 10% to 15% of your salary. Hit the 10% to 15% target ASAP puts you in the best shape to have enough saved for a comfortable retirement. If you’ve been relying on your workplace retirement plan to set your contribution rate, you could be way short of 10%. Many employers set a new participant’s contribution rate at just 3% or so of salary. Check your rate; it’s easy to alert the plan (or HR) that you want to increase your savings rate.

Don’t turn down the workplace bonus. If you have a workplace retirement plan, such as a 401(k) or 403(b),  that comes with a matching contribution from your employer, you obviously want to qualify for the maximum match. That match is no different than a bonus, and you’re not about to turn down a bonus. Right? Yet about one in five people who have a workplace plan aren’t contributing enough to get the maximum match. While getting to a 10% to 15% savings rate ASAP is your goal, at the very least make sure your current contribution rate earns you the maximum match.

Be smart when you job hop. When you leave a job where you have been saving in a workplace retirement plan, you have the option of keeping your money growing for retirement or cashing out the account. The cash out is tempting, especially if the account is “just” $10,000 or so.  It’s natural to think of all the cool things you could do with the money: a vacation before the new job. Pay off more of your student loans. Pay down credit card debt. Don’t do it. For starters, if you are younger than 55 when you leave a job and cash out, you will owe a 10% early withdrawal penalty to the IRS. And if the money is in a Traditional 401(k), you’ve got income tax to pay. Cashing out $10,000 could leave you with less than $7,000. But if you keep the $10,000 growing for retirement, it will be worth nearly $55,000 in 25 years.

Make the most of other tax-advantaged accounts. Everyone is eligible to save for retirement with an Individual Retirement Account (IRA). If your health insurance is a High Deductible Health Plan (HDHP), you also have the ability to use one of the most powerful retirement savings plans: a Health Savings Account (HSA). The tax-breaks on an HSA are better than what you get with any type of 401(k) or IRA.

Save today for retirement health care costs. Medicare kicks in at age 65, but as comprehensive –and affordable—as coverage is, there are still plenty of costs you will need to cover yourself. For a 65-year old couple with typical medication needs, it’s estimated they will spend more than $250,0000 to cover their out-of-pocket medical expenses in retirement. Households with above-average medication costs will need even more. That’s one more reason to consider HSAs: you can build up a sizable account balance and then in retirement, use the money to cover your out of pocket health care costs. Every penny you pull out of an HSA for a qualified medical expense is tax-free. That will sure help you ace your retirement.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

About the author

Carla Fried

Carla translates business and personal finance concepts into engaging content that helps individuals make more confident choices in how they manage their money. Her work appears in The New York Times, Money Magazine, Barron's and Consumer Reports.

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