How to Boost Your Retirement Savings

July 11, 2018

It’s always nice when you can maximize your retirement savings early in life. But the demands of life often make that hard to accomplish. It’s often easier to start small, and gradually boost your retirement savings over several years. It’s a strategy well worth putting into action.

There are several ways to do this that are relatively pain-free:

Add Your Tax Refund to Your Retirement Savings Every Year

According to the IRS, the average federal income tax refund is $3,120. That, of course, doesn’t include a state income tax refund, which often accompanies a federal refund.

Many people use their tax refunds to buy something they otherwise can’t afford. It might be a down payment on a new car, a vacation, or a room full of furniture. But imagine how nice a refund of more than $3,000 would look sitting in your retirement savings?

Now imagine you do that each year for the next 20 years – you’ll have over $60,000 in additional contributions, plus the investment earnings they’ll accumulate. That could increase your retirement savings by well over $100,000!

This is one of the easiest ways to boost your retirement savings. Technically speaking, it could even be considered a payroll savings plan. Since the money is being withdrawn from your pay each pay period, for paying taxes, it’s almost like it’s going into a savings account with the US government.

So from now on, forget about spending your tax refund. Instead, invest it for the future, so that it will produce even more income.

One more thing…if you contribute that extra money into a retirement plan, it’ll be tax-deductible. That might get you an even bigger refund next year.

Add Pay Increases to Your Retirement Contributions

If you’re pretty good about living within your budget, this is a pain-free way to boost your retirement savings. You’re taking the additional income, and putting it into retirement savings rather than folding it into your budget.

For example, let’s say you get a 3% pay increase this year. You allocate the additional income either to an employer-sponsored retirement plan or as a payroll deduction into an IRA account. If you’re making $50,000 per year, 3% means an extra $1,500 will go into retirement savings.

What’s more, that contribution will be tax-deductible. That means you’ll retain even more of the raise than you would if you simply added to your budget and spent it.

It’s also a good way to dramatically increase your retirement contributions. For example, let’s say you contribute 6% of your pay to your 401(k) plan, but you expect a raise of 3% per year in each of the next four years. By adding each raise to your retirement savings every year, you’ll increase your contribution from 6% to 18%.

That might even put you in a position to retire early.

If You Have an Employer Plan, Add an IRA to the Mix

Even if you have an employer-sponsored retirement plan at work, you may still be eligible to set up and contribute to an IRA.

For 2018, you can earn up to $63,000 per year if you’re single, and up to $101,000 if you’re married filing jointly and still make a tax-deductible IRA contribution.

And even if your income exceeds those limits you can still make a contribution that’s either partially deductible or fully non-deductible. Even though you don’t get the deduction, you’ll still get the benefit of the additional retirement savings, plus the benefit of tax-deferred investment earnings.

Since you can contribute up to $5,500 per year, or at $6,500 per year if you’re 50 or older, adding an IRA to the mix could be a way to seriously boost your retirement savings.

Cut an Expense (or two, or more) and Dedicate the Savings to Retirement

If there any expenses you have where you’re paying for services you no longer use or don’t use much, you can eliminate them and redirect the cash flow into retirement savings.

Let’s say for example you have cable TV for $80 per month. You decide to eliminate it and take a Netflix subscription for $10 per month. That frees up $70 per month or $840 per year.

You can either increase your 401(k) contributions by that amount or redirect the money into an IRA account. Once again, the additional contributions will be tax-deductible, so your cash flow should even improve by a little bit.

Save Money in Non-Retirement Accounts

We don’t normally think of retirement savings in connection with taxable accounts. But in reality, any kind of savings potentially qualifies as retirement savings.

You could be saving money in certificates of deposit, a taxable brokerage account, mutual funds, or even a robo-advisor platform.

The contributions won’t be tax-deductible, and the investment income won’t be tax-deferred – but there will be two major advantages in doing it anyway:

  • 1. Since taxable accounts are not tax-favored, there will be no tax liability created when you begin withdrawing funds from the account in retirement. That will lower your tax liability in retirement, and even make it possible to reduce the number of taxable withdrawals from your tax-deferred retirement accounts.
  • 2. You can withdraw the money at any time before retirement, without having to worry about paying either ordinary income tax or an early withdrawal penalty.

You can think of it as being a tax diversification strategy, to help minimize your taxes in retirement. That’s not a crazy idea either. Between Social Security, a pension (if you have one), and withdrawals from various retirement accounts, your income may be higher in retirement than you realize. That will have tax consequences. Having money saved in taxable accounts can minimize that outcome.

Pick one or two of these strategies to boost your retirement savings, and watch your portfolio take off from there.

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