Key Takeaways
- Saving enough money to retire comfortably is a challenge. To ensure you don’t run out of money, you’ll need to plan carefully, save aggressively and invest intelligently.
- The best way to boost your chances of a successful retirement is to start saving and investing as early as possible (and for as long as possible).
- You can grow your retirement savings by using tax-advantaged vehicles, diversifying your investments, reducing debt, managing expenses and adding additional sources of income.
- Using the services of a fiduciary financial advisor, such as a Certified Financial PlannerTM (CFP®) professional, is highly recommended when making your retirement plan.
Most people have retirement plans, but many struggle to save enough to retire comfortably. If you don’t have enough money saved up for retirement, you could face longevity risk or the possibility of living longer than expected and running out of money. Overcoming this challenge requires careful planning, aggressive saving and wise investing.
Below are five strategies and interrelated tips to help grow your retirement savings for the future.
Start Early and Contribute Regularly
The most important thing you can do to bolster your retirement journey is to start saving and investing as early as possible, and for as long as possible. Doing this will unleash the power of compound interest and accelerate your ability to accumulate wealth for decades.
But saving money takes discipline. At first, it can be difficult, but once you practice saving, it becomes habitual. Initially, aim to save at least 10% of your income each year. As your finances improve, work on saving a little more each year.
Maximize Your Contributions to Employer-Sponsored Retirement Plans
One of the easiest ways to boost your savings is to participate in work-sponsored retirement plans, such as traditional 401(k) plans and 403(b) plans, which allow you to set up automatic payroll deductions and electronic funds transfers.
Generally, it makes sense to maximize 401(k) contributions and 403(b) contributions each year. You’ll receive upfront tax deductions and be able to watch your money grow on a tax-deferred basis. If you’re not able to maximize your contributions, aim to at least contribute enough money to take full advantage of any available employer matches.
For 2024, the IRS allows you to contribute up to $23,000 per year (or $30,500 if you’re age 50 or older) into 401(k) and 403(b) plans. This is an aggregate limit, which is collectively applied to all accounts you own.
Take Advantage of Other Tax-Advantaged Accounts
As your ability to save increases, consider putting some money into other types of tax-advantaged retirement accounts, such as traditional individual retirement accounts (IRAs) and Roth IRAs. Both types of investment vehicles provide powerful tax advantages.
Contributions to an IRA will provide an upfront tax deduction as well as the ability to grow your money on a tax-deferred basis. Contributions to Roth IRAs are made on an after-tax basis, and the money is allowed to grow in the account on a tax-exempt basis.
For 2024, the IRS allows you to contribute up to $7,000 per year into traditional and Roth IRAs (or $8,000 per year if you’re age 50 or older). This is an aggregate limit, which is collectively applied to all accounts you own.
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Diversify Your Investment Portfolio
To save up for retirement, you’ll want to invest in growth-oriented assets, such as stocks and real estate. Debt investments, which include certificates of deposit, bonds and banks loans, can also make sense in some situations if the investments are tilted heavily toward growth.
With any investment strategy, it’s important to be aware of potential risks and make sure your portfolio reflects an appropriate degree of diversification. A low-cost way to do this is to invest in fund-style vehicles like index funds, exchange-traded funds (ETFs) and real estate investment trusts (REITs).
It’s also important to keep a dynamic asset allocation strategy that reflects how much time you have until you reach retirement. Early on in your retirement journey, your strategy should strongly emphasize growth, and only a small portion of your money should be allocated to stable-value debt instruments. However, as you approach your planned retirement date and move into retirement, you should temper your growth-oriented investments and increase the allocation to safe-haven investments.
Maintain a Liquidity Reserve
As noted above, ensuring you have enough money to retire requires you to invest as early as possible, and for as long as possible. However, you still need to establish and maintain an emergency liquidity reserve with enough money to pay for at least six to 12 months of living expenses. This emergency reserve should be a permanent part of your financial plan, ideally stored within a high-yield savings account or a money market mutual fund. Right now, the most competitive instruments in this space are yielding over 5%.
Reduce Debt and Manage Expenses
To aggressively grow your retirement portfolio, you’ll need to do more than just think positively. Instead, you’ll need to diligently maintain a lean budget, continuously funnel money into your investment accounts and avoid problematic, high-rate debt. You’ll also need to monitor your finances, embrace frugality and avoid psychological spending traps.
Consider Additional Income Streams
In many cases, accumulating enough wealth for retirement requires you to add additional sources of income. This is especially true if promotions and big pay hikes are rare in your line of work. In these situations, launching a side hustle can be worthwhile. Perhaps, you could leverage your education and work experience to start a consulting business. Maybe you could join the gig economy to bring in some extra money during your free time. Alternatively, you could monetize a hobby.
If working more doesn’t appeal to you, consider ways you might generate passive income streams. This may require some upfront planning and work, but the effort can produce steady, hands-off income for years to come. Some common ways to produce passive income include establishing an affiliate marketing program, offering educational content online, selling stock photography or renting out unused assets and residential space.
Seek Professional Advice
Hypothetically, anyone can come up with a retirement plan. However, most people lack the necessary knowledge and skills to put one together. Even fewer can objectively maintain a plan over time, given the financial hurdles and behavioral challenges that are bound to surface.
A better approach is to use the services of a fiduciary financial advisor, such as a Certified Financial PlannerTM (CFP®) professional. These professionals can help you come up with a plan and put into practice a risk-conscious, long-term investment strategy. A professional can also help you stay informed about changes in the market and regulations you need to be aware of. Ultimately, a financial advisor can help increase your chances of retiring comfortably.
Key Questions for Choosing a Financial Advisor
When selecting a financial advisor, the first question to ask is whether they hold the CFP® certification. Generally, if they say “no,” you shouldn’t hire them. However, if you trust the person and they hold another esteemed certification, such as a CFA charter or a CPA license, make sure they can function as a fiduciary.
Once you get comfortable with the advisor’s professional qualifications and fiduciary stance, find out about the specific services they offer. Ask about their expertise with budgeting, retirement planning and investing, and ask how they advise their clients on these topics. If possible, get a copy of a case study or two. At a minimum, the advisor should verbally walk you through some real-life success stories.
Editor Norah Layne Contributed to this article.
Frequently Asked Questions
In the U.S., if you were born in 1960 or later, the Social Security Administration defines “full retirement age” as 67. This is the age at which you are entitled to claim full retirement benefits from the government. If you claim Social Security benefits before reaching full retirement age, your benefits could be reduced by as much as 30%.
The amount of money you need to save for retirement varies depending on where you live, your lifestyle preferences, family size, level of debt and health. Most experts suggest your retirement income should equal about 70% to 80% of your pre-retirement annual income.
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