Running out of money in retirement is a real concern for many Americans. The solution is simple -- save more money -- but it's rarely easy to implement. Many can't afford to devote more of their paychecks to retirement because they need them to cover living expenses, pay down debt, or save for other goals, like purchasing a home. If this sounds all too familiar, I have good news.
There are a few simple things you can do to boost your retirement savings without giving up any more of your hard-earned cash. Here's an overview of three such strategies.
1. Look for ways to cut back on fees.
All retirement accounts charge some fees. Some cover administrative costs, like record-keeping, while others are directly associated with the investment products themselves. For example, mutual funds have expense ratios, which are a sort of annual fee that all shareholders pay. You can determine how much you're paying in fees by checking your 401(k) plan summary or looking at the prospectus for the investments you own.
You'll usually see them listed as a percentage of your assets. So if your fees amount to 1% of your total assets, you'll have to pay $1,000 per year for every $100,000 you have in your account. The more you invest, the higher your fees will climb, and this can impede your ability to save.
But there are ways to reduce your fees. See if you can move your money to lower-cost investment products like index funds. These are mutual funds that passively track a market index, like the S&P 500. They're affordable because fund managers don't need to do as much to manage these accounts and there's less buying and selling, which means fewer transaction fees. Many index funds have expense ratios of around 0.2% or less.
If your employer doesn't offer any low-cost investment products through the company 401(k), and it isn't matching any of your contributions, consider moving your money to an IRA. You'll have more investment choices, and IRA fees are often cheaper than 401(k) fees.
2. Start saving as early as possible.
Even if you don't feel you can contribute a substantial amount to your retirement savings, you should put away as much as you can as early as possible. This helps you out in two ways. First, it reduces your taxable income this year (unless you're contributing to a Roth account). And second, it gives your money more time to grow. The money you contribute to your retirement savings compounds over time, and even small contributions can add up to thousands of dollars over the long term.
Consider a $50 monthly deposit every month for 30 years. By the end of that time you would have contributed $18,000 to your retirement account. But if it had a 7% annual rate of return, it would be worth $56,676. And the difference gets more dramatic the more money you put away. If we change that $50 monthly deposit to a $100 monthly deposit, you would have contributed $36,000 by the end of 30 years, but it would be worth over $113,000 with a 7% rate of return.
3. Contribute to your retirement accounts regularly.
Making regular contributions to your retirement accounts, as opposed to a yearly lump sum, has several benefits. It creates a habit and forces you to save regularly, and it also helps your money to grow more quickly. Waiting to make IRA contributions until the end of the year could result in a hefty "procrastination penalty," according to a study by Vanguard.
The company compared two hypothetical investors who both contributed the same amount of money to their IRA each year. One contributed every month while the other contributed a lump sum at the end of the year. The research found that after 30 years, the person who made monthly contributions ended up with about 10% more money in their account because their money had extra months to compound.
If you have a 401(k), it should be easy for you to set up automatic deposits to your retirement account. You decide what percentage of your paycheck you'd like to go to your 401(k), and the money is automatically transferred each pay period. If you have an IRA, you may be able to set up a recurring deposit from your bank account, or you can just remember to transfer the funds manually each month.
Just make sure you don't exceed the contribution limits for the year, or else you risk paying a penalty tax on the extra. You can contribute up to $19,000 to a 401(k) in 2019 -- $25,000 if you're 50 or older. You can also contribute up to $6,000 to an IRA or $7,000 if you're 50 or older.
These strategies can help to ease the burden of saving for retirement without putting a greater strain on your current finances. Try one or two of them and see what kind of a difference they can make for you.
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