The Best Way to Save for Retirement
Depending on your age and goals, planning how to save for retirement may seem like a distant priority. But by creating—and sticking to—a savings plan early, you can make the most of your money so you're prepared when it's time to retire.
Building financial security takes patience, and saving for retirement is an excellent example. Even if you're not currently on track or don't feel like you've saved enough, there are things you can do to change your financial roadmap and catch up. While there is no single best way to save for retirement, using a mix of these retirement tips to plan for success can help you get started on your journey.
1Start with your end goal
You wouldn't plan a vacation without knowing where you're going or how you'll get there. Retirement planning is no different. Understanding where you are today and what your end goal is will help you identify gaps in retirement planning so you can change course while you still have time.
Start by setting your ideal retirement age and how much money you'd need to live comfortably in retirement. If you're unsure, use a retirement calculator to determine the amount. Then make a list of your expected savings and sources of income, such as Social Security, annuities and pensions.
When you understand where you are now and what your goals are, it's easier to spot gaps in your retirement savings plan and course correct sooner.
2Make retirement a top priority
It's easy to feel overwhelmed by competing financial objectives like paying down debt or saving for education. But unlike college—where you can apply for scholarships or take out a loan—there aren't any surefire ways to save for retirement other than Social Security.
While it's tempting to use extra money from a raise or tax refund to pay debt or plan a vacation, consider saving it for retirement instead. Use an IRA contribution retirement calculator to see how the money will grow and what its value will be at retirement.
It's also true that the earlier you start saving for retirement, the less you'll have to save each year. Compound interest is a powerful tool that's designed to make your money work harder. The sooner you start taking advantage of it, the better off you'll be.
3Automate your savings
It's no surprise that money is harder to save when it's at your disposal and easier to save when you don't actually see it. That's what makes automatic transfers such a helpful saving tool.
To stay on track, set up automatic transfers from your paycheck to your retirement savings fund, and remember to increase the amount whenever you get a pay raise or a new source of income. These small, regular contributions to your retirement savings can have a big impact over time.
4Make tax-advantaged catch-up contributions
If you're 50 or older, you can contribute an extra $6,500 to your 401(k) annually, bringing your eligible contribution limit to $27,000 per year. You can also contribute an extra $1,000 above the $6,000 annual limit for IRAs.
If you started saving for retirement later in life and are wondering how to maximize retirement savings, use catch-up contributions to help you recover lost ground and benefit from tax advantages.
5Think beyond your 401(k)
If you have a 401(k) or other company-sponsored retirement plan, consider contributing the maximum if you're financially able. Even then, depending on your retirement goals and when you started saving, the maximum may not be enough. In that case, consider opening a Roth or traditional IRA, or another savings account.
6Don't forget healthcare
Even once you reach Medicare eligibility at age 65, you'll still have to pay out-of-pocket costs like deductibles and co-pays. Beyond that, what if you or a loved one needs extended care that isn't covered by Medicare? This is a good reason to plan and save for unexpected healthcare expenses that could otherwise derail your retirement.
The good news is that it's never too late to understand how to maximize retirement savings and get the most out of it. If you need guidance, a trusted financial advisor can help you set a course and guide your progress along the way.
