Once upon a time, workers counted on a company pension to fund their retirement. Today, thanks to the advent of individual retirement accounts (IRAs), responsibility for building your financial future is in your own hands.
People are getting the message about different ways to save. According to a Fidelity Investments survey, IRA balances reached an all-time high through the fourth quarter of 2016 when the average saver had $93,700 tucked away for his or her later years.
If you’re a little behind on saving for retirement, don’t fret. There’s still time to get your nest egg on track and automating your savings can help you catch up. Here’s how to do get your retirement strategy on track.
Choose a Target Savings Number
One of the most important things to know when it comes to retirement is how much money you’ll need. Surprisingly, 81 percent of Americans in a Bank of America Merrill Lynch survey said they have no clue how much money is necessary for a comfortable retirement.
Think about your current income and lifestyle and how that may change as you move closer to retirement. Do you expect to be earning more—or less? Will your expenses increase in retirement or will you be spending less? The answers to these questions can help you narrow down how much money you’ll need in total to make your ideal retirement a reality.
Next, consider your current savings and your timeline. From there, you can break down how much you need to be saving in your IRA, 401(k) and other retirement accounts yearly to hit your goal. Then, take it a step further and calculate how much of your income you need to sock away each month. Now, compare that number to your budget to see if it’s realistic and doable.
If it is, you’re already on your way to a more financially secure retirement. If not, you may need to rethink your expenses or find ways to increase your income to allow you to contribute the desired amount to your IRA.
Prioritize Tax-Advantaged Savings
Where you save for retirement is just as important as how much you save. Your first priority should be funding tax-advantaged accounts, such as an IRA or your employer’s retirement plan, before adding money to a taxable brokerage account.
With a Roth IRA, for instance, your qualified withdrawals in retirement are 100 percent tax free. The benefit here is that if you’re in a higher tax bracket in retirement, those withdrawals won’t add to your tax liability. A Traditional IRA, by comparison, gives you the advantage of being able to deduct your contributions and pay taxes on your withdrawals when you retire. That could be more appealing if you’re at a higher income level now than you expect to be in retirement.
A taxable brokerage account can supplement your IRA savings but it doesn’t offer any kind of tax break. When you sell an investment in a taxable account for more than what you paid for it, the gains are taxable. The long-term capital gains tax—which applies to investments held for more than one year—maxes out at 20 percent for the wealthiest taxpayers. Investments held less than one year are subject to the short-term capital gains rate, which is the same as your ordinary income tax rate.
Making sure you’re getting the most leverage tax-wise is important because it can affect how much you have to save for retirement. If you’re contributing to a 401(k), for example, those contributions are deducted from your taxable income each year. The same goes for Traditional IRA contributions. By paying less in taxes, you leave yourself more money to put aside for the future.
Automate Your Contributions
Once you’ve decided how much money to add to your tax-advantaged and taxable accounts, the last step is to make those contributions consistently. Scheduling automatic contributions monthly, quarterly or annually takes the guesswork out of growing your investments.
Remember to check in with your investments periodically, however, to make sure that your investments are meeting your expectations performance-wise. As you get older, you may need to rebalance every so often to ensure that you’re not taking on too much risk. And if your income increases and you have more disposable funds to save, you’ll want to update your contribution amount to reflect that.
If you’re saving in an employer’s 401(k) alongside your IRA, check to see if auto-escalation is an option. This feature allows you to increase your elective salary deferral percentage automatically each year. If your annual contribution increase coincides with an annual raise, you could build a healthier retirement savings account without making a noticeable difference in your paycheck.