1. Start saving early

The first step toward reaching your retirement goals is to simply start saving money. Thanks to the power of compound interest, the earlier you can start saving, the better. Compound interest is nothing more than the interest that you earn from your interest. With compound interest, you earn money from the money you’ve already earned.

To give you an example of how compound interest works, let’s say you made an initial investment of $10,000 and in year one, your investment earned 5% in interest, for a total of $500.

That would mean in year two, your starting balance would be $10,500. Now let’s say that in year two you earned another 5% in interest. The only difference is that now you’d be earning 5% of $10,500. So, in year two, you’d accrue $525 in interest. That’s $25 more in interest than year one even though you earned the same rate of return.

Compound interest can have a magical effect on your retirement portfolio. But in order for compound interest to really gain steam, you need to give it time. That’s why starting early and committing to lifelong saving for retirement is so important.

Using MagnifyMoney’s compound interest calculator, you’ll find that if you saved $500 a month for over 30 years with a 7% annual rate of return, you’d end up with an account value of over $600,000.

That’s a nice sum. But what if you had just started saving 10 years earlier, for a total of 40 years instead? In that case — assuming the same 7% annual rate of return – your retirement portfolio would grow to over $1.3 million by your retirement date, more than double the total from 30 years. That’s why investing when you’re young is a good idea, especially if you want to retire early.

2. Get rid of your debt

Compound interest is great when it’s working for you. But it can work against you as well. When you only making minimum payments on high-interest credit card debt, debt balances can compound quickly.

Credit card debt

MagnifyMoney recently updated our statistics on credit card debt. Statistics show that many Americans are increasingly taking on more credit card debt. Here are two key pieces of data that were uncovered:

• Credit card interest payments are up 49% over the last five years. Last year, Americans paid over $113 billion in interest payments, up over 12% from just the year before.
• The average APRs on credit card accounts that were assessed interest are now 16.86%. That’s up nearly four percentage points over the last five years.

Every extra dollar that you pay towards interest is money that you’re not able to save for retirement. That’s why getting rid of high-interest debt could really jumpstart your retirement saving.

Student loan debt

For many of us, credit card debt isn’t the only kind of debt that we’re dealing with. Our research shows that nearly 1 in 5 adults carry student loan debt. MagnifyMoney’s analysis of anonymized My LendingTree users’ September 2018 credit reports (Note: LendingTree is MagnifyMoney’s parent company), the average student loan debt for each borrower was $36,314.

If you’re wondering whether to pay off your student loans early or invest the money instead, begin by considering the interest rate on your student loans. If your student loans have an average interest rate of 5%, then you have a guaranteed 5% rate of return when you pay them off early.

But the average annualized S&P 500 rate of return over the last decade has been approximately 10%. Plus, when you invest money you get to take advantage of compound interest. And if you have an available match with an employer-sponsored retirement plan, that’s an awesome opportunity that you probably don’t want to waste.

To help you get a better idea which strategy would work best for your situation, try using our Payoff Student Loans vs. Investing Calculator.

3. Set a retirement savings goal

There are two main ways to go about setting your retirement savings goal:

Save a percentage of your income

One way is to aim to save a certain percentage of your income. Fidelity says that 15% of your pre-tax income is a good starting point. But, depending on your situation and retirement goals, your personal target could be different.

Set a retirement savings number.

Another strategy is to set an actual retirement number. In other words, you decide exactly how much money you’ll need to have saved before you can quit the day job.

To calculate your retirement number, a common rule of thumb is to plan to live off a 4% withdrawal rate in retirement. Using the 4% rule, if you want to withdraw $50,000 a year in retirement, you’d need to save $1.25 million.

No matter which way you choose to set your retirement goals, realize that you may need to tweak your retirement plan over time.

Automating your retirement savings

Once you’ve decided how much you want to save on an annual basis, it may be a smart idea to automate the savings. Setting up a consistent transfer from your bank to your brokerage account helps make the savings less emotional. You just set it and forget it.

How often you set up automatic retirement savings transfers is really up to you. You may want to set up a monthly transfer. Or you may prefer to save a percentage of every paycheck.

Whichever strategy you choose, automatic transfers help you to build retirement savings into your budget from the get-go rather than waiting to see if you have money “left over” at the end of the month. The more that you can approach your retirement savings as just another bill, the easier it will be to stay on track.

4. Choose an asset allocation mix that fits your risk tolerance

The mix of stocks and bonds in your retirement portfolio should reflect how aggressive you hope to be and the amount of risk you’re willing to be exposed to. While aggressive portfolios can have higher upside potential in the long run, they can also produce bumpier rides in the short-term. And if you’re not prepared for that, it could lead to problems.

“If you take more risk than you are comfortable with, you could end up panicking and selling at the worst possible time, said Brandon Renfro, a financial planner based in Texas and a Retirement Income Certified Professional®. “Taking too much risk could cause you to literally work against yourself.”

There are many investment tools available today that can assess your risk tolerance and suggest your ideal asset allocation. And many of the top robo-advisors will rebalance your portfolio whenever one type of investment grows faster than the others.

5. Minimize investment commissions and fees

Commissions and fees on your investments may seem small now. But they can make a big difference in your retirement savings over time. Vanguard estimates that if you paid 2% in investment costs every year for the next 25 years, it cost you up to 40% in your final account value. That’s staggering.

If you use a financial advisor, check to see how much they’re charging you on an annual basis. You’ll want to pay attention to the expense ratio on your mutual funds too. And if you’re really serious about finding low-cost investments, you may want to consider index funds.

6. Use tax-advantaged retirement accounts

To encourage retirement savings, the government gives individual retirement accounts (IRA) special tax treatment. Taking advantage of these tax breaks is a smart retirement strategy.

With a Traditional IRA, your contributions will typically be tax deductible. However, you will have to pay taxes on your withdrawals in retirement. Roth IRAs are the opposite. While they don’t offer an up-front tax break, growth and withdrawals are both tax-free.

For 2019, the maximum that you can contribute to either type of IRA is $6,000 for those under 50 years old.

Traditional IRA or Roth IRA?

How do you decide which type of IRA is best for your situation? “A Roth IRA can be a good avenue if you’re young and haven’t reached your peak earnings yet,” said Kayse Kress, a CFP at Physician Wealth Services.

But there are exceptions. Kress said that contributing to a traditional IRA could lower your student loan payments if you’re on an income-driven repayment plan. And if you’re pursuing a forgiveness program like Public Service Loan Forgiveness (PSLF), it could be an even smarter move.

“If you’re going for PSLF, you want to lower your payment as much as possible to maximize your student loan forgiveness,” Kress said. “You’re saving yourself now by lowering your student loan payment and saving for later by saving in your retirement account.”

Open a separate IRA for your spouse

Already maxing out your IRA? If you’re married, you can open a separate one for your spouse, even if he or she doesn’t work.

The IRS rules dictate that your annual contributions can’t exceed your joint taxable income, but it doesn’t matter who earned the income. If you’re married, this could be a simple retirement strategy to double your tax-advantaged savings each year.

7. Contribute to your employer’s 401(k) plan

Does your employer offer a company 401(k) plan? If so, you may want to consider contributing to the plan. Employee 401(k) plans have two key upsides. First, they come with a higher contribution limit than individual IRAs. In 2019, you can contribute up to $19,000. Second, some employers offer a 401(k) match.

How 401(k) matches work

If you’re not familiar with 401(k) matching, here’s how it works. When your employer offers a match, they are saying that they’ll match your 401(k) contribution, up to a certain point.

Many employers use a partial 401(k) matching strategy. In this scenario, will match a percentage of your contributions. For instance, your employer may match 50% of your contributions, up to 5% of your salary.

With dollar-for-dollar matching, your employer matches 100% of your contributions. While dollar-for-dollar matching is a fantastic perk, it’s also less common because it can be very expensive for employers.

How to choose between contributing to a 401(k) or IRA

If your employer offers a match, that’s free money that you don’t want to leave on the table. It’s like getting an immediate 50% return or more on your money. You don’t want to pass that up.

But it’s also important to point out that some 401(k) plans can have high administrative costs. “Depending on your employer, the plan may not be the greatest,” said Sharif Mohammed, a CFP based in New Jersey.  “Sometimes it’s best to take advantage of any match that’s available and then max out your IRA options before moving back to your 401(k).”

8. Don’t ignore health care

It’s true that once you reach age 65, you’ll be eligible for Medicare. But there are certain medical costs that Medicare won’t be able to cover — optical care, dental care and long-term care are just a few examples. In fact, Fidelity says that the average couple will need $285,000 in today’s dollars for medical costs throughout retirement.

Medicare Supplemental Policies

For these reasons, buying a Medicare Supplemental Policy in retirement could be a smart move.

A Medicare Supplemental Policy (also known as Medigap) is health insurance sold by private insurers that can help pay for things that Medicare doesn’t cover. “For people that can afford it, I absolutely recommend a Supplemental Policy,” Kress said, “especially if you have specific doctors that you want to continue going to.”

A Medigap policy could help with coinsurance, copayments and deductibles as well — all which are not covered by original Medicare. To qualify for a Medicare Supplemental policy, you’ll need to have Medicare Part A and Part B. It’s also important to note that you and your spouse would each need to have your own separate Medigap policy.

For more information on Medicare Supplemental policies and where to find them, check out the Medigap guide on Medicare.gov.

Health Savings Accounts (HSA)

One way to bridge any medical expense gaps you may have in retirement is to save money in a Health Savings Account (HSA).

To be eligible for an HSA account, you’ll need to be enrolled in a high deductible health care plan. But, if you are, HSAs have the potential to offer triple-tax savings.

First, your contributions can be excluded from your taxable income. Second, your earnings grow tax free. And third, you can don’t have to pay tax on your withdrawals as long as they’re used to pay for medical expenses.

And, after age 65, you can use HSA money for any purpose without penalty. You will have to pay income tax on any distributions that don’t pay for medical costs though.

9. Take advantage of “catch-up” contribution allowances

Are you a little behind on your retirement savings? That’s ok. It’s never too late to get started. Plus, once you’re past age 50, the government allows you to put more money each year in tax-advantaged retirement accounts.

For 2019, individuals age 50 or older can contribute up to $7,000 per year in an IRA. That’s an increase of $1,000 from the regular $6,000 contribution limit. And if you’re over 50, you can contribute up to $6,000 more per year in your employer 401k plan.

10. Think about your social security benefits withdrawal strategy

You can begin taking social security income as early as age 62 or as late as age 70. You’ll receive a higher monthly payout if you delay withdrawals. But that doesn’t mean it’s always the best decision.

Some retirees simply need the income to meet their needs. Others may be in poor health and are worried that they won’t live long enough to break even. In either situation, taking social security benefits at age 62 could be the right move.

11. Get professional advice

You don’t have to figure everything out alone. You may want to schedule an appointment with a CFP to discuss your retirement strategies. A CFP will look at your entire financial situation and can help you set your retirement goals.

If you’ve found a local advisor who says they’re a financial planner, ask specifically if they’re a CFP. “Financial planner” is a term that can be thrown around loosely in the financial advisor world.

Even if the advisor claims to be a CFP, you still may want to verify their certification with the CFP Board. The CFP Board can also be a great resource for finding a CFP near you.

If you’re specifically looking for a fee-only financial planner, the Garrett Planning Network, the XY Planning Network and the National Association of Personal Financial Advisors are three great places to begin your search.

If you’d rather handle your retirement planning yourself, that’s fine. But don’t ever feel bad for seeking out professional help.

The bottom line

There are lots of ways to boost your retirement savings. But not every retirement strategy works for everyone, so consider what’s best for your personal situation. And don’t get overwhelmed by the options. Ultimately, the most important retirement strategy is the one we covered first — simply saving money.

As Kress puts it, “People worry about intricate retirement strategies, when at the end of the day, people just need to create a plan where they’re living below their means. That’s what every good retirement plan is built on.”