The earlier you start saving money for retirement, the bigger your retirement fund is going to be. Many people do not know how to properly save money so that their retirement account grows as much as possible. Here we look at four simple practices that can help you fatten your retirement savings.
1. Start out small and be consistent
Some people tend to avoid saving thinking that they will do so once they are able to contribute a “good enough” amount of money every month. What you need to remember is that every dollar matters when it comes to savings. Even if what you can save is just a small amount, why not save it rather than spend it for unnecessary purposes?
“The key to saving for retirement is to be consistent. It should be a continuous, lifelong habit. Thus, it helps to set yourself up for success. For example, don’t attempt to scrape together the cash for a last-minute contribution to an IRA in April right before you file your tax return. Instead, save a little each month, ideally using an online savings account, and only tap into it in extreme emergencies,” according to Investopedia.
To ensure that you consistently save money, automate your retirement savings. This way, every time your paycheck is deposited into your bank account every month, a predetermined amount is automatically withdrawn and saved into the retirement fund. In contrast, if you wait to manually contribute to the account, there is a chance that you might delay or even miss some of the monthly contributions due to other expenses, thus negatively affecting the retirement fund.
2. Catch up contributions
In case you are 50 years of age or older, you can start making contributions to your 401 (k) and IRA accounts beyond the normal limits.
Known as catch-up contributions, this will allow you to buff up your retirement savings in case you haven’t made too many deposits in the past. As of 2020, this allows people 50-plus years of age to contribute an additional US$1,000 or US$6,500 every year into their IRA and 401 (k) accounts respectively.
3. Delay social security
If you can delay the receipt of social security payments till the age of 70, you can actually raise the amount you get in the future quite significantly. One study showed that social security checks rise by up to 32 percent if you only start collecting when you hit 70 years old. In addition, you also increase the potential survivor benefits of your spouse. So if your family members have a history of living long lives, like well into their nineties, and you have excellent health for your age, it might be better to delay social security checks. In contrast, if your family members have passed away in their sixties or seventies and you have poor health, only then does it make sense for you to cash in on social security early on.
4. Tax credits
If you come from the lower or middle-income class, you can take advantage of tax credits especially available for this group.
The government allows you to claim tax credits on up to 50 percent of your retirement plan contributions. The income limit for single filers is US$32,500 and couples filing jointly is US$48,750. The maximum tax credit you can receive is US$1,000 for single filers and US$2,000 for married couples filing jointly.