Long, relaxing road trips, lazy rounds of afternoon golf, and wintering somewhere warm — for many Americans, that is the retirement dream. Unfortunately, for many, a well-earned and financially secure retirement is only a dream — and one that’s increasingly out of reach. The Center for Retirement Research at Boston College estimates that approximately half of those retiring at age 65 won’t be able to maintain their pre-retirement lifestyle. But with the proper planning, those dreams can become a reality. Whether retirement is a couple of years or more than a decade away, it's never too late to start making a few smart moves to set you up for a comfortable retirement. Here are a few strategies to consider when planning your golden years.
Make the Most of Matches
Company matches to your 401(k) retirement plan are essentially free money — take advantage. Use this calculator to see how much your employer contributes to your retirement savings — and contribute at least the same percentage of your annual salary that your employer matches to maximize the benefit.
Use Government Tax Breaks
The U.S. government provides a variety of incentives to save for retirement. Utilize the tax advantages offered by traditional or Roth IRAs, which are plans contributed to with after-tax dollars. Also, consider investing more in 401(k)s and 403(b)s, which are plans offered to many nonprofit and government employees. Additionally, a Thrift Savings Plan (TSP), defined as money saved during working years, can help you save thousands of dollars each year. If your adjusted gross income (AGI) is less than $54,750 (for a head of household) or $73,000 (for a married couple filing jointly), you can also earn a tax credit of up to 50% for contributions to a qualified retirement plan. Use this table to calculate your saver’s credit.
Take Advantage of Your HSA
Contributions to your health savings account (HSA) are 100% tax-deductible, and withdrawals for qualified health expenses are also 100% tax-exempt. At 65, the funds that remain in an HSA can be used for anything, not just medical expenses. Starting in 2024, people — or their employers — can contribute up to $8,300 per year for a family or $4,150 for an individual.
Start Saving Early
Working adults have traditionally been advised to save 10% to 15% of their pre-tax income for retirement, but times have changed. Longer lifespans, increased healthcare costs, and inflation mean that future retirees should probably attempt to save more. The later you start, the more you need to save each year to reach your goals.
For those saving from an earlier age, it may be worthwhile to embrace the FIRE lifestyle, which stands for “financial independence, retire early." This strategy focuses on living frugally, with practicing individuals often saving 50% or more of their annual income to retire early.
Reduce Current Expenses
The amount you can save for retirement is dictated by how much you spend now — the present predicts the future. Just as adopting a healthy lifestyle has positive effects on you later on, maintaining sensible spending patterns can help you effectively plan for your future. Extravagant spending reduces the funds available for retirement and means that having to cut back on your lifestyle can be harder to maintain in the future.
Savings do not grow after retirement, restricting the choices you make with your money. Investing portions of your savings is one way to continue earning even after you finish working. Setting up a high-yield savings account, buying stocks, or using mutual funds (pooling your money with other investors to purchase stock mutually) are just a few ways to start a passive income alongside saving your income.
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