The following strategies can help you make the most of your saving and investing opportunities at each stage of your life.
Starting Out in Your Career
You may not feel like you have enough money to invest when you’re just getting started in your career. But even making small investments when you’re young can have a big long-term impact on your finances.
Save in your employer’s retirement plan. It’s easy to start saving for the future if your employer offers a 401(k), 403(b), 457 or the Thrift Savings Plan. The money is automatically invested from your pay before you have a chance to spend it on anything else. Any amount you invest when you’re young can grow significantly by the time you retire. For example, if you get paid twice a month and invest $100 from each paycheck starting when you’re 25, your account could be worth more than $500,000 by the time you reach age 65, if your investments return 7% per year. Traditional 401(k) contributions reduce your taxable income and grow tax-deferred until withdrawn. If you’re in the 22% tax bracket, contributing $200 per month only reduces your take-home pay by $156. Or you can make Roth 401(k) contributions, which don’t reduce your taxable income now but can be withdrawn tax-free in retirement. An extra incentive to save: You may also qualify for the Retirement Savers’ Tax Credit, which can reduce your tax liability by up to $1,000 per person, depending on your income. See You can save more for retirement in 2020 for more information.
Get free money from your employer. Many companies match employees’ contributions to their 401(k) or other retirement-savings plan. Try to invest at least enough to get the full match — don’t leave this free money on the table.
Build tax-free savings with a Roth IRA. If you don’t have a retirement-savings plan through your employer, or if you have some extra money to save, contribute to a Roth IRA. This flexible account is a great way to save for the future while also giving you access to some of the money if needed before then. You can withdraw your Roth IRA contributions at any time without taxes or penalties, and you can withdraw the earnings tax-free after age 59 ½, as long as you’ve had a Roth for at least five years. You can contribute up to $6,000 to a Roth IRA in 2020 if your modified adjusted gross income is less than $124,000 if single, or $196,000 if married filing jointly (you can make a partial contribution if your income is less than $139,000 if single or $206,000 if married filing jointly).
Invest for the long term. When you’re young, you can afford to invest your retirement savings more aggressively — you have time to ride the stock market’s ups and downs over the short term so you can benefit from the potential for higher returns over the long run. You can create a diversified portfolio primarily of stock funds offered in your 401(k), IRA or other account. Or you can take the easy approach: Most retirement-savings plans offer target-date funds, where investment professionals create a diversified portfolio based on your retirement time frame. These funds start out primarily in stock funds when you have decades before retirement and gradually shift more money to conservative investments, such as bond funds and cash, as your retirement date gets closer. If you plan to retire in 40 years, for example, you’d invest in a 2060 target-date fund.
Building Your Career
As your income grows, you can afford to save more for the future — and may have some new opportunities to save, too — but you’re also likely to have more expenses and responsibilities.
Boost your savings when you get a raise or bonus. Even increasing your savings by a small amount every year can make a big difference over the long run. You can invest up to $19,500 in a 401(k) in 2020 (or $26,000 if you’re 50 or older).
You can also contribute up to $6,000 to an IRA (or $7,000 if you’re 50 or older). You can build tax-free savings in a Roth IRA if your income is below the cut-off, or you can contribute to a traditional IRA at any income level.
Get a triple tax break from a health savings account. If you have a high-deductible health insurance policy (with a deductible of at least $1,400 if you have self-only coverage, or $2,800 for family coverage in 2020), then you can make tax-deductible contributions to a health savings account. The money grows tax-deferred and then can be used tax-free for medical expenses in any year. You’ll get the biggest tax benefit if you use other cash to pay your deductibles and co-payments now and keep the money growing in the HSA for the future. See Six strategies to make the most of a health savings account for more information.
Build up an emergency fund. As you have more financial responsibilities, it’s important to build up your emergency fund so you don’t land in expensive debt if you need home or car repairs or if you lose your job. It’s a good idea to keep at least three to six months’ of expenses in a safe and liquid account. See the Consumer Financial Protection Bureau’s Essential guide to building an emergency fund for more information.
Get a handle on your expenses. You don’t need to create a formal budget, but it’s a good idea to track your expenses for at least a month and look for areas where you can cut back. You may be surprised how quickly small expenses can add up. Then you can use that extra money to build your emergency fund, pay down debt, or boost your savings.
Make the most of other tax-advantaged ways to save. If you have any self-employed income — even from a little freelance work on the side — you can make tax-deductible contributions to a Simplified Employee Pension (SEP) or a solo 401(k). See Retirement savings options for freelancers for more information.
Married With Children
When you get married, you may have more saving opportunities but also more expenses — and it’s also important to coordinate your finances between both spouses. If you have young kids, you may be overwhelmed with everyday expenses and may not even want to think about saving for the future. The following can help you juggle your family’s expenses with saving for your children’s college and your own retirement, which should still be a priority.
Make the most of both spouses’ retirement plans. If you and your spouse both have 401(k)s or other retirement-savings plans at work, make the most of both plans. Make sure you both contribute at least enough to get the full employer match at each of your jobs. If you can’t afford to max out both plans, invest more in the plan with lower fees and better investments.
Contribute to a spousal IRA. If only one spouse earns an income from a job, he or she can contribute to a spousal IRA on the other spouse’s behalf — which can help you continue to save if you’re staying home with the kids and don’t have access to an employer’s 401(k).
Take advantage of tax-advantaged college savings, too. Even if you’re stretched thin, it can help to start saving a little bit in a tax-advantaged 529 college-savings plan. You may be able to deduct your contributions from your state income taxes (depending on your state) and you can withdraw the money tax-free for college expenses. A new law new lets you withdraw up to $10,000 tax-free to pay off student loans, too. See www.savingforcollege.com for more information about 529 plans.
Save more in an HSA. If you have a HSA-eligible family health insurance plan, you can contribute up to $7,100 to a health savings account in 2020. Your contributions are tax-deductible (or pre-tax if through your employer) and you can withdraw the money tax-free in any year for medical expenses.
Getting Closer to Retirement
As you get closer to retirement, there’s more pressure to reach your savings goals — and you may have more opportunities to save, too. You can start making catch-up contributions to your retirement-savings accounts after age 50, and you may have more money available to save after your kids are out of school and on their own.
Take advantage of catch-up contributions. You can contribute an extra $6,500 to your 401(k), 403(b), 457 plan or the Thrift Savings Plan if you’re 50 or older in 2020, bringing your total contribution limit to $26,000. You can also contribute an extra $1,000 to an IRA if you’re 50 or older, bringing your contribution limit to either a traditional or Roth IRA up to $7,000 for the year.
Build up HSA savings for medical expenses in retirement. You can contribute an extra $1,000 to an HSA if you’re 55 or older in 2020, in addition to the $3,550 for single coverage or $7,100 for family coverage. Not only can you use the HSA money tax-free for health insurance deductibles, co-payments and out-of-pocket medical expenses, you can also withdraw money tax-free for Medicare Part B and Part D and Medicare Advantage premiums, and a portion of long-term care premiums based on your age.
Gradually shift to conservative investments. As retirement gets closer, you have less time to weather any market volatility, and should start shifting some of your money to more conservative investments. But remember that retirement could last for 20 or 30 years, so you don’t want to become too conservative. You may want to start to move enough money to cover the first few years of expenses in retirement into a stable value fund or money-market fund, and keep the rest of your money invested in a portfolio of stock funds and fixed-income funds. If you have a target-date fund, the investment professionals will automatically move some of your money into more conservative investments as you get closer to retirement, while keeping the rest invested for the long run.
After you retire, your focus shifts to making sure you don’t outlive your money. More people are continuing to do some work in retirement and can keep saving for a while — and a new law gives them some more options. It’s also a key time to assess how your sources of lifetime income compare to your regular expenses, and what to do to fill in the gap.
Continue saving if you can. More people are continuing to do some work late in their 60s or 70s, even if they retire from their full-time jobs. As long as you have some earned income, you can contribute to an IRA — up to the amount you earned for the year, or $7,000 (if you’re 50 or older), whichever is less. There’s no age limit for contributing to a Roth IRA, as long as you meet the income requirements. In the past, you couldn’t contribute to a traditional IRA after age 70 ½, but a new law removed that restriction — you can now contribute to a traditional IRA at any age, too.
Decide when to take Social Security benefits. Social Security is one key source of lifetime income, and decisions you make will affect the amount. You can choose to take Social Security benefits as early as age 62 or delay until as late as age 70. The older you are when you start receiving benefits, the larger the annual payouts will be. If you start taking benefits at 62, your annual payouts will be reduced as much as 30% for your lifetime. Delaying benefits past your full retirement age (which is 66 for people born from 1943 to 1954) will increase your annual benefits by 8% for each year you delay, until age 70. See How much will you get from Social Security? for more information.
Calculate your retirement income gap. Add up your regular expenses in retirement, then subtract your guaranteed sources of retirement income, such as from Social Security and any pension, and figure out how to fill in the gap. You could carefully withdraw money from your retirement savings on your own, or you could get an immediate annuity or deferred-income annuity to provide some guaranteed income in retirement, especially if you don’t have a pension. See Making sure your assets last in retirement for more information.
Protect your retirement savings from large expenses. Figure out how you’re going to protect your retirement savings from potentially large expenses, such as long-term care costs. See What is a hybrid long-term care/life insurance policy, and how does it compare to traditional long-term-care insurance for more information about some ways to protect your savings from these expenses.
Set aside money for upcoming expenses in a safe account. As you start to take withdrawals from your retirement savings, it’s important to shift some money into safe investments so you don’t have to worry about whether you’ll have the money to pay your bills during a market downturn. But you may still live for a long time in retirement, and your savings may not keep up with inflation if you move too much money into conservative investments. Some people shift a few years’ worth of expenses into a safe account so they know the money is available, then invest the rest in a balanced portfolio, and gradually refill the safe bucket as they spend money from it. If you know you have your regular expenses covered with guaranteed income from Social Security, a pension and maybe an annuity, then you may be able to keep more of your money invested for the longer term. Target-date funds usually continue to keep some money in equity funds — sometimes 30% or more — even after you reach your retirement date.
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