Don’t settle for a too-small war chest when you retire. These moves can make you more financially secure.
Americans are having an even harder time than usual saving for their retirement, according to the 2023 TIAA Institute-GFLEC Personal Finance Index. Inflation caused a quarter of survey respondents to decrease their retirement savings in 2022. Even worse, half of those folks stopped saving entirely.
That’s terrible news since most of us need to be amassing a war chest for retirement. Fortunately, there are a bunch of retirement-savings hacks that you might employ to better your financial situation. Here are a few.
1. Pay off high-interest debt
This move is important for anyone saddled with high-interest debt, such as that from credit cards. Such debt, which often charges interest of 25% or more, can make it difficult, if not impossible, to save for your future. Imagine owing $30,000. If you’re being charged 25%, you’re having to fork over $7,500 each year just to cover the interest. Whatever debt you can pay off will let you keep more money in your pocket — or your investment account — instead of spending it on interest payments.
2. Increase your 401(k) contributions
Next, if your employer offers a retirement savings plan such as a 401(k), make the most of it. Many employers offer matching contributions to employee accounts, so aim to grab all available dollars — as that’s free money. Also, try to be aggressive in how much money you contribute to your account from your paycheck.
A smart hack is to increase your contribution percentage regularly — perhaps upping it by 1% or 2% each year. You may not be able to up your contribution rate from, say, 5% to 10% overnight, but that may be quite achievable over a few years.
3. Don’t cash out your 401(k) accounts early
Many people are making a critical mistake with their 401(k) accounts — often multiple times: They’re cashing out their accounts when they change jobs. That can seem reasonable, if you only worked at a job for a few years and have a modest amount in your account. But even modest accounts can grow large over time. You’ll be robbing your future self of some financial security by cashing out.
Consider what would happen if you had $25,000 in your account and you rolled it over into an IRA account where it grew for 20 more years, averaging 8% annual growth: It would become more than $116,500.
4. Save and invest raises and windfalls
Many, if not most, of us receive raises every year or every few years. Here’s an effective retirement savings hack: Move all of your raise into your savings and investing accounts. If you were getting by on your pre-raise salary, odds are that you can keep getting by on it for another year or more. You probably can’t bank every raise, but doing so with a bunch of them can keep your retirement accounts growing.
It’s the same with any windfall you’re lucky enough to receive. If you collect an inheritance, consider parking most or all of it in your retirement accounts.
5. Contribute to an HSA
If you have a high-deductible health insurance plan, you may be able to pay for qualified expenses with pre-tax dollars via a health savings account (HSA). A flexible spending account (FSA) is similarly useful, but the money in it is there on a use-it-or-lose-it basis. Money in an HSA will stay there from year to year until spent — and come retirement age, whatever remains in it can be withdrawn and spent on anything, though some taxes can apply. It’s like a stealth retirement savings account.
6. Favor Roth IRAs and Roth 401(k)s
IRAs and 401(k)s generally come in two main varieties — traditional and Roth. A traditional account receives pre-tax contributions, shrinking your taxable income and therefore your taxes due for the year of the contribution. A Roth account, on the other hand, is funded with your post-tax money, meaning that your taxable income and tax bill are unchanged. But if you play by the rules, all your withdrawals in retirement can be tax-free. That can be a big deal.
Imagine amassing a Roth IRA account worth $500,000 by retirement (which is very possible, assuming retirement is not around the corner). You’d be able to use every dollar of that in retirement without surrendering anything. Read up on these accounts before focusing only on Roth ones, though, as traditional accounts can make sense for people in certain circumstances.
7. Harvest investing losses
Finally, learn enough about taxes to make savvy, money-saving moves. For example, if you’re sitting on some underwater stocks and you have taxable capital gains for the year, you might sell some losers to generate a loss that can offset some or all of your gains. Tax-loss harvesting can be a powerful move
These are just some of many possible hacks you might employ to save more money for retirement. A little online research can turn up many more — such as always living below your means and relocating to a region with a lower cost of living.