Everyone wants higher balances in their retirement accounts,
but the reality is that socking more money away can force 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 drastically change your
lifestyle.
1. Increase your 401(k) contributions by 1%
As the following chart demonstrates, a 1% change in
contribution, especially when applied over a long time horizon, makes a
tremendous difference in your projected retirement balance. These projections
assume no beginning balance, a 30-year time horizon, and a $50,000 salary in
all scenarios.
This is an oversimplification as you'll likely receive pay
increases along the way, and stock returns fluctuate. But it's an easy way to
see how even a 1% change in contribution to your employer plan can make a big
difference over time.
A 1% change is not going to require much of a change in your
lifestyle, but it will most definitely affect your ability to live comfortably
in retirement.
2. Front-load your Roth IRA
It's good practice to contribute as much as you can to your
Roth IRA as early in the year as realistically possible. This is true for two
reasons:
First, the sooner you can get money into your Roth IRA, the
sooner it will be able to compound tax-free. As we've established many times
before, it's 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's a substantial psychological benefit to
knowing you've already funded your Roth IRA for the year. This means there's no
longer any need to budget for it, and you don't need to sacrifice future nights
out to ensure your retirement account is where it needs to be.
3. Invest as cheaply as possible
Another way to ensure you're well-set for retirement is to
save on fees wherever you can. Commonly, young investors inadvertently purchase
investments with high expense ratios or costly front-load fees. Steep expenses
are unnecessary and should be cut from your investment portfolio as soon as
possible.
Most broad market index funds can be had at low or zero
cost, so it makes sense to read the fine print and know exactly how much you're
paying for every investment you own. Research generally indicates that low-cost
index funds tend to outperform most actively managed funds anyway, so you're
not missing out by going the inexpensive route!
4. Look into a Solo 401(k)
If you're earning an income outside of your primary job --
or if freelancing is your primary job --
a Solo 401(k) can help you save even more for retirement. While acting
as both the employee and employer, those under 50 are eligible to contribute up
to a maximum of $58,000 to a Solo 401(k) in 2021, while a traditional employer
401(k) will only allow annual contributions of $19,500. The limits for those 50
or older are $64,500 and $26,000 respectively.
Freelancing can bring a number of enhancements to your
lifestyle, but you'll need to be incredibly disciplined and driven if you
choose this route. By focusing on Solo 401(k) contributions, you'll have a
chance to save more for retirement while also lowering your current year tax
liability.
Retirement: So far but yet so close
Retirement may seem like a long time from now, but it will
come faster than you think. This is why it's especially important to take
advantage of every opportunity you have to save and to begin as soon as
possible. By making a few small adjustments -- and thinking outside the box --
you'll be able to put yourself in a strong position when your golden years
finally arrive.
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