You’ve worked hard to save money for your retirement, but is it enough?
Do you have less than $10,000 in savings (not including your house or pension)? If so, you are not alone. The Employee Benefit Research Institute reports that 28 percent of Americans aged 55 and older have less than that saved. Don’t stress, though. There are ways to add to your nest egg and, in the process, get peace of mind. Here are three things you can do:
1) The most obvious — but the most difficult — is to stay at your job longer if you’re still working. (According to EBRI, nearly four out of 10 workers today expect to retire at age 70 or later.) Set a savings goal and then stick to it. If you’re not disciplined about setting aside a portion of your paycheck and earmarking it for savings, then set up an automatic savings deposit. You can even set up multiple savings accounts, often without paying any extra fees. Designate one a “rainy day fund” and another a “vacation club,” but make sure you’ve got one that’s strictly savings. That way, you can withdraw from the rainy day fund when the air-conditioning quits working or the vacation club account when you take your next holiday excursion, but still have a savings account that you do not need to withdraw from until needed in retirement.
2) If you’re retired already, or you’re about to retire, financial planners recommend a planned strategy for using the monies you’ve saved in retirement accounts, especially if you have your savings spread among several different types of accounts — for example, a traditional taxable brokerage account; a tax-advantaged account like a 401(k) or IRA; and a Roth IRA account. The strategy: make sure you withdraw from these in a way that reduces your tax burden. Remember: these accounts are designed to give you a nest egg during your retirement years, so you’ll want to withdraw from them wisely.
If you need additional money to meet your expenses, withdraw first from your traditional taxable brokerage account. One of the advantages of a regular taxable brokerage account is that there are no limitations on when you can withdraw money and for what purpose you can use it. There are no penalties for early withdrawals.
Try to avoid withdrawing from tax-advantaged accounts like 401(k)s and IRAs for as long as possible. That way, you reap the benefits of tax-free compounding (you don’t pay annual capital gains or dividend taxes in these accounts). Obviously, once your taxable account is exhausted, you will need to withdraw from a tax-advantaged account, such as a traditional IRA or 401(k). Note: when you are 70 1/2 years old, you are required to take a minimum distribution from these types of accounts.
If you have a Roth account, withdraw from it last. Roth accounts have no required minimum distribution, and all withdrawals after age 59 1/2 are tax-free.
Following this strategy could help you save thousands of dollars in taxes during your retirement years.
3) Borrow the “keep the change” idea available from Bank of America. Here’s how that program works: Each time you use a Bank of America Visa debit card, the bank rounds up the difference to the next dollar amount and deposits it into your savings account. For example, you swipe your card for $9.75. The charge against your account is $10, and 25 cents goes into your savings account. Under certain conditions, Bank of America matches this amount. There are downsides — the 100 percent match is good for only three months, for one. So why not adapt this strategy the old-fashioned way? Take the loose change out of your pocket, your wallet, purse or car tray, and save it in a jar. Find additional ways to add more money to your jar. For instance, every time you withdraw cash from the ATM, put 10 percent of what you withdraw into the jar or if you cover a friend’s lunch, deposit the money they repay you into your jar. Every quarter, take the money accumulated in your jar and add it to your savings account.