Everyone wants higher balances in their retirement accounts, but the reality is that putting more money aside may require you to sacrifice your lifestyle today. Sometimes that sacrifice is necessary, but it’s also a good idea to think about how you can get the best of both worlds. Below are five ways to save for retirement that shouldn’t cause you to dramatically change your lifestyle.
1. Increase your 401 (k) contributions by 1%
As the following chart shows, a 1% change in contributions, especially when applied over a long-term horizon, makes a huge difference in your projected retirement balance. These projections assume no opening balance, a 30-year time horizon, and a salary of $ 50,000 in all scenarios.
|Contribution (%)||Contribution ($)||Return rate||Projected balance|
|6%||$ 3,000||8%||$ 367,038|
|7%||$ 3,500||8%||$ 428,211|
|8%||$ 4000||8%||$ 489,383|
This is an oversimplification, as you will likely receive salary increases along the way and stock returns fluctuate. But it’s an easy way to see how even a 1% change in your employer plan contribution can make a big difference over time.
A 1% change won’t require much change in your lifestyle, but it will most definitely affect your ability to live comfortably in retirement.
2. Load your Roth IRA up front
It is good practice to contribute as much as possible to your Roth IRA as early as possible in the year. This is true for two reasons:
First, the sooner you can put money into your Roth IRA, the sooner it can accumulate tax-free. As we have established many times before, it is time in the market that matters, so the sooner you take advantage of tax-sheltered space, the better off you’ll be in the long run.
Second, there is a substantial psychological benefit to knowing that you have already funded your Roth IRA for the year. This means that you don’t have to budget for it anymore and you don’t need to sacrifice your future evenings to make sure your retirement account is where it needs to be.
3. Invest as cheaply as possible
Another way to make sure you’re well prepared for retirement is to save on fees whenever you can. Usually, young investors inadvertently buy investments with high expense ratios or expensive entry fees. High expenses are unnecessary and should be removed from your investment portfolio as soon as possible.
Most broad market index funds can be purchased at little or no cost, so it makes sense to read the fine print and know exactly how much you are paying for each investment you own. Research generally indicates that low cost index funds tend to outperform most actively managed funds anyway.
4. Look in a Solo 401 (k)
If you earn income outside of your main job – or if you are self-employed is your main job – a Solo 401 (k) can help you save even more for retirement. While acting both as an employee and employer, those under 50 can contribute up to a maximum of $ 58,000 to a Solo 401 (k) in 2021, while a traditional 401 (k) employer will only allow annual contributions of $ 19,500. The limits for those 50 and over are $ 64,500 and $ 26,000, respectively.
Self-employment can make a number of improvements to your lifestyle, but you will need to be incredibly disciplined and motivated if you go this route. By focusing on Solo 401 (k) contributions, you will have the opportunity to save more for retirement while reducing your tax liability for the current year.
Retreat: so far but yet so close
Retirement may seem far away, but it will come sooner than you think. That’s why it’s especially important to take every opportunity to save and start as early as possible. By making a few small adjustments – and thinking outside the box – you can put yourself in a strong position when your golden years finally come.