Whether you are just getting started or fine-tuning your retirement plan, there are several things you can do today to boost your chances of being financially secure in your retirement years.
Not only do economic changes affect us from year to year, but personal situations can greatly influence how we save for our retirement years. Regardless of these unpredictable factors, there are certain ways to maximize our results, if we just play it smart.
10 retirement-fund moves
Take a look at these basic tips that may help to make your retirement years more enjoyable, less stressful, and with less financial burden.
Sure, it's obvious. Nevertheless, too few workers are setting aside money for their golden years. "It's never too late to start retirement savings, and never too late to beef it up," says Dee Lee, a Certified Financial Planner and author of "Women & Money."
If you're fortunate to receive a raise or bonus in your job, perhaps you can set aside all or part of your extra earnings, or a regular portion of your paycheck, for retirement. But even if you don't have extra cash to stow away, small changes in your daily life can reap big rewards.
Cut back on the number of times you order take-out dinners or go out to eat each month. Be creative in ways to reduce your spending on a daily basis, thereby adding extra savings in the long run.
Maximize (or boost) 401(k) contributions
In recent years, employers have been backing away from providing pensions, lifetime health insurance and other benefits that had been valuable safety nets to employees long after they leave work.
Companies are putting the onus on workers by adopting 401(k) plans and other plans that are funded by employees' salaries, rather than company largesse. The number of employers offering old-style pension plans has been dropping steadily, according to Hewitt Associates.
If you have a 401(k) plan at work and aren't putting as much as you can in it, increase your contributions. In 2008 individuals can stash up to $15,500 of pretax earnings in a 401(k). For those 50 or older by year's end, the limit is $20,500. The overall contribution cap to a 401(k) (including employer matching funds) is $46,000.
If funding caps seem out of reach for you right now, make sure to at least pack away enough of your earnings to trigger so-called matching funds. These are free contributions employers make to 401(k) plans on employees' behalf, as long as those workers save a minimum amount. Generally, most companies require individuals to save 6 percent of their salary to receive matching funds, according to Profit Sharing/401(k) Council of America, or PSCA.
Employers are increasingly offering Roth 401(k) plans, a twist on the 401(k). With a Roth 401(k), contributions are made with pay that's already been taxed, so you won't be taxed at a later date. For this reason, experts say they're a good choice for employees with lower salaries or anyone else who expects to pay higher taxes in the future.
Make IRA contributions
When you fund an IRA, whether traditional or Roth, you aren't just putting money aside, you're capitalizing on a chance to let your assets grow without being eroded by taxes. With a traditional IRA, earnings grow tax-deferred, meaning you pay the folks at the IRS only when they're taken out, usually at retirement. Plus, depending on your income, you may also qualify to claim tax deductions for any contributions you made to the plan. A traditional IRA allows an annual contribution of up to $5,000 per person, or $6,000 for those over 50.
With a Roth IRA (contributions already taxed), you do not pay taxes on earnings. Because there's no required date to start taking withdrawals, you can fund a Roth for as long as you like. It can even be passed along to your heirs, untouched. That's not true with a traditional IRA or 401(k). To qualify for a Roth IRA in 2008, a married couple filing a joint return can not have income that exceeds $169,000. For a single person, the limits max out at $116,000.
Don't forget a nonworking spouse
A nonworking spouse is also eligible for an IRA and can add to your retirement bundle. "Opening an IRA for a nonworking spouse is good tax planning as well as retirement planning," says Dee Lee, a Certified Financial Planner. "Money in that IRA will compound tax-deferred."
"If this is in a Roth, it will all be tax free forever," says Ed Slott, an IRA expert and author of "Your Complete Retirement Planning Road Map." For that reason, Slott says the Roth IRA wins hands-down when it comes to picking an IRA for anyone, whether they work on not.
Do your financial housekeeping each year
Reallocating your assets to stay on track may seem daunting. But if you don't tend to this financial housekeeping at least once a year, retirement funds may inevitably grow out of whack.
You'll want to make sure that you own the right mix of stocks, bonds, mutual funds, cash and other assets to help meet your retirement goals. As the economy and your personal situation may very well change each year, you'll want to regularly assess your needs and strategy.
Consider target-date funds
Target-date funds also help employees maintain a diversified mix of assets because they automatically shuffle and remix their holdings to reflect age and retirement target date. As you get older, the funds become more conservatively invested.
"People might want to look at them," says Ed Ferrigno, vice president of Washington Affairs at PSCA. "They're a convenience so you don't have to rebalance."
As helpful as target-date funds are, they're designed with a cookie-cutter approach to investing. They may, in fact, not be allocated to best suit your personal goals, financial net worth or risk tolerance.