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Are you one of the 80% of Americans worried they won't have enough money saved for retirement? If so, don't worry. We have four ways to make your 401(k) balance grow faster so you can retire in comfort.
The ideal goal is to begin saving for retirement with your first job. It's great advice, but most of us don't (or can't) follow it.
The great news is there are still steps you can take now to make sure you have enough money saved for retirement, even if you're behind on saving for retirement.
This first tip is essential to your retirement investing...
Ways to Make Your 401(k) Balance Grow Faster: Start Today
If you haven't started saving for retirement, you are in good company. About 33% have nothing saved, according to a GOBBankingRates.com survey.
The solution is to get started... now.
Whether you have an employer-sponsored 401(k) or you open an IRA through a broker, the important thing is to stop putting it off. The only way you can make sure you have enough money for retirement is to start investing today.
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It's easy to get bogged down in all of the ins and outs of investing. While those things are important, they won't make much of a difference if you are not investing at all.
Once you start saving, the next step is to make sure you are saving enough at each stage of your career. Here's a breakdown of how much to save at every age...
Ways to Make Your 401(k) Balance Grow Faster: Know Your Number
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There are numerous formulas and retirement calculators out there to determine your retirement savings needs, but I like this method better, mostly because it's simple. It's based on age and income.
Here are the ideal savings totals for every age:
- 35: 2x your gross salary at that age
- 45: 4x your gross salary at that age
- 55: 7x your gross salary at that age
- 65: 10x your gross salary at that age
The beauty of this is that as you make more money, the target increases naturally. It's also easier to see if you are on track well before you have problems.
Let's say you have a goal of $1.5 million for retirement. It can be hard to tell if you are saving enough to reach your goal if you're in your 30s and 40s and still have decades to go until you retire.
The targets above help you know if you are on track early in your investing career. They also allow you to make more clear investment targets to get and stay on track.
Even with these targets, investing at least this percentage of your gross pay each month will help you save enough for retirement...
Ways to Make Your 401(k) Balance Grow Faster: Work Towards 10% of Income
When you first start investing for retirement, it's important to put any amount of money towards your goal.
However, once you get started, you want to work towards putting away 10% or more of your gross income. This sounds like a lot, but starting small and gradually increasing the amount you contribute to your retirement plan will make this more manageable.
If your employer has a matching program, your contributions will add up even faster.
Saving for retirement in a 401(k) or IRA allows you to save money on a pre-tax basis. The downside to this is the maximum yearly investment is $17,500. Once you hit the maximum investment, you will need to invest outside of retirement accounts.
While this may sound scary at first, don't worry. There are many great advisors who can help you develop an investment strategy to ensure you meet your retirement goals.
The last component of retirement investing involves taxes...
Ways to Make Your 401(k) Balance Grow Faster: Know the Tax Implications
There are two important caveats with taxes to consider when planning for retirement.
The first is simple. Many are entitled to a tax credit (saver's credit) by simply investing for retirement. If you are currently saving money in a formal retirement account, talk to your accountant to make sure you are getting this credit if you qualify. There's no need to leave free money on the table.
The second tax consideration is a little more complex and it deals with current taxes versus taxes in retirement.
Traditionally, it was assumed that you would pay more taxes in your working years than your retirement years. Based on that assumption, investors were advised to put money into a traditional 401(k) to reap the tax benefits today.
The problem with that is most working adults have tax credits and deductions available to them that are not available to them in retirement. These tax advantages include dependent care credit, student loan interest deductions, and mortgage interest deductions.
To combat a large tax burden in retirement, Roth 401(k) accounts were created. In these accounts, you pay taxes on the money when you contribute it instead of when you withdraw it during retirement.
The question becomes how to decide which account is best for you.
Conventional wisdom suggests investing in a work-sponsored 401(k) to max out an employer contribution. After that, everything else should be invested in a Roth IRA.
Even if you don't have an employer match, splitting your investments between a traditional account and a Roth account is a sound idea because it allows you to split your tax burden between your working years and retirement. This strategy allows you to average out your tax burden no matter when you pay the most taxes.
The best way to determine which account(s) to invest in for retirement is to meet with a financial advisor. They will be able to determine where you are now, what your savings goals are, and the best way to accomplish those goals.
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