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Saturday December 14th 2019

How to Double Your Retirement Nest Egg

If you’re over 50 now and the retirement nest egg you had planned while you were younger was sidetracked by life, fear not. Although parental responsibilities, less than expected raises and higher than anticipated living expenses can cut into your retirement savings, you can still retire comfortably. If you begin now, there are a number of tools that can help boost your retirement account before the boss hands you that gold watch for all your years of service.

Increase Your 401k Contributions

If your 401k contribution does not equal the maximum amount of your employer matching contribution (up to 6% of your salary, depending on the plan specifications), you might consider increasing your contribution. There are few investments that will double your investment immediately and none that will do it on a tax deferred basis like the 401k does.

If you’re making $50,000 per year and your employer will match up to 6% of your salary, you are putting an extra $6,000 in your account annually, $3,000 of which comes from your employer. Making a contribution like this can add up quickly.

Even if you are already maxed on your employer matching contributions, you might consider contributing more into your account, since it is a tax deferred investment. The IRS permits you to contribute up to $16,500 into your account, depending on the plan limits. After 2010, the contribution limits will fluctuate depending on inflation. And if you are over 50, you can contribute an additional $5,500.00 annually as a “catch up provision.” This too will fluctuate in future years, depending on inflation.

Increase Your IRA Contributions

If you have a Roth IRA or traditional IRA, both are good retirement tools to use. With a traditional IRA, you receive a tax deduction up to the maximum allowable amount of your contribution. The interest earned on the account is also tax deferred, meaning you do not pay tax on interest earned until you withdraw the money. Plus there’s no reason you can’t have both on top of your 401k.

On a Roth IRA, you receive no tax deduction for your contribution. However, when you withdraw the money at retirement, you are not taxed on the interest earned. This can become important at retirement, when you will have less income to live on.

Both IRA and Roth IRA contribution limits have been increased in recent years. Contribution limits are now $5,000. If you are over 50, the limit is $6,000. Over 15-20 years, this investment will certainly add up, especially considering the interest accruing on the account.

For instance, if you are 50, and plan on retiring at 70, and invest $5,000 per year, and earn 5% on your investment, you balance at age 70 will be $185,542.21. If you have a traditional IRA, you have not paid tax on any of this money for the past 20 years. If you have a Roth IRA, you won’t pay tax as you withdraw it.

Use the Equity in Your Home

A house is still usually the biggest investment a typical person makes in their lifetime. In years past, most people had their mortgages paid down or paid off as they approached retirement years. This is not as true anymore, as many people will carry their mortgages into retirement.

If you are becoming an empty nester, you might consider downsizing. If you no longer need the room of a 4 or 5 bedroom home, consider moving down to a 2 or 3 bedroom home. You will not only most likely reduce your mortgage payment, but will also reduce your utility costs and real estate taxes. Consider these monthly savings as income, and use it to fund an IRA or increase the contribution to your 401k.

Consider a Second Job to Fund Your Retirement

This might be in the form of a second job or a small, home based business. Even a few hundred extra dollars per month will go a long way to increasing your retirement account. The internet has created reach to people on a world wide basis like never before. Use the web as your tool to increase your income, and use that income to increase your retirement portfolio. Better to work it now than be forced to keep working at retirement age.

Start your ROTH… Now!

If you are in your twenties, you should be thinking now about your retirement nest-egg. Why? Simply, the earlier you start the more you get to benefit from the power of compound interest? If you invest $1 when you are 25, that dollar may be worth as much as $21. If, however, you wait until you are 35, to save that dollar, it will be worth around $10, or less than half of the total amount (calculations assume 8% annual return). Every dollar you save when you are 25 is worth two dollars when you are 35.


Set It and Forget It Retirement Savings

Not everyone has the personal interest or energy to put a lot of effort into retirement savings. But we should all understand how important it is to have a nest egg when you are too old to work. Even if you plan to work until the day you die, things don’t always work out that way. For those who want to save for retirement without nursing along an investment account, there are ways to save that take little effort.

Surely the easiest way to save for retirement is a 401(k) plan, especially if you have an employer that will match your contributions. But even the self-employed can open and 401k that is easy to manage and grow. This is what we mean by “Set It and Forget It.”

The 401(k) plan has been around more than 25 years and has proven itself the simplest way to save money for retirement. Plan participants simply set up automatic deposits and check the balance of investments periodically to their risk tolerance. That’s why over 47 million Americans use the 401(k) to save for retirement.

Someone who starts a 401(k) at the start of his or her working life can easily amass millions in savings through regular, relatively painless contributions that grow over time. Even those who do not start until their forties can still have a shot and saving enough for a reasonable retirement. Catch-up contributions are allowed for workers age 50 and older to help them reach retirement goals, even if they are late getting started.

The added benefit of these plans is the free advice attached to the accounts. Most 401(k) plans are administered by investment firms that offer free analysis and tools online that help workers assess their risk tolerance, set goals, and manage the balance of investments quickly and easily.

In the early years of investing, 401(k) portfolios are typically heavy in riskier investments like stocks. As the participant ages, plans may shift to include a higher balance of low risk investments, but also lower profit, investments. This makes an older employee less likely to lose everything in the event of a stock market collapse. Many plans now offer investment accounts that follow this risk curve with age, without any input or work required by the plan participant.

Workers should work towards the goal of automatically depositing at least 15% of their gross income into a 401(k) each week. If they do so, they are likely to have about half of their income level to draw on during retirement, once adjusted for inflation. Social security benefits should add another 25% to provide retirees with a comfortable living in their golden years. Seniors could make up the balance through part time work, rental properties or outside pensions, or simply by living a lifestyle that requires less money to fund.

There are just two steps to creating a Set It and Forget It retirement. First, enroll in a 401(k) plan that automatically increases your contributions until they reach 15%. Second, choose a target-retirement fund that has a target date near your expected retirement date. The plan does the rest.

To get the most out of the retirement accounts available, there is a best strategy for workers to follow. First, contribute to your 401(k), up to the maximum amount your employer will match. Then, contribute up to the maximum ($5,000) possible on a separate Roth IRA. The balance should go back into your 401(k). Not only does this maximize your retirement investment, it also provides you with a mix of taxable and non-taxable funds to draw at retirement.

The self-employed aren’t getting any employer contributions. For this reason, it’s best to choose one of the plans tailored for your situation. This can be a Solo 401(k), also called a Defined Contribution plan. Other retirement plans for the self-employed such as a profit-sharing plan, Keogh or SEP will let you deduct contributions up to 2% of your self-employment income, maxing out at $49,000 or $54,500 for those over age 50.

But the Solo 401(k) has gained some improvements in recent years that make it more like a traditional employee’s plan. For instance, you can deduct $16,500 worth of contributions (assuming you make that much or more) and $22,000 if you are over 50 years old. You can then contribute another 20% of your self-employment income on top of that. Oh, and that $16,500 initial contribution can be made on an after-tax basis, giving you a nice little tax-free withdrawal when you retire. On the down side, there will be some set up and maintenance fees.