When it comes to managing your retirement savings, you'll find that grabbing the low-hanging fruits goes a very long way in terms of your long-term results. Knowing a few key details will ultimately make a substantial difference in the amount you're able to save, so take care to make these incremental changes and reap the benefits later.
1. Increase your 401(k) contributions by 1%
Even a 1% increase can make a tremendous difference in the ultimate size of your retirement savings balance. For simplicity, let's assume you earn $100,000 annually and currently contribute 6% of your salary to your company's 401(k) plan. Let's also assume you'll never get another raise again and your contribution percentage stays consistent throughout your working career.
| Contribution Percentage | Annual Dollar Contribution | Assumed Rate of Return | Time to Retirement | Ending Balance at Retirement |
|---|---|---|---|---|
| 5% | $5,000 | 8% | 30 | $611,729 |
| 6% | $6,000 | 8% | 30 | $734,075 |
| 7% | $7,000 | 8% | 30 | $856,421 |
We see that there's a significant difference in your ending retirement balance by simply requesting a 1% increase of your annual contribution percentage. This is truly an amazing effect and should only take a minute or two to put into practice.
2. Open a Roth IRA
Supplementing a workplace retirement plan is another very simple way to shorten your timeline to retirement. A popular way to do this is by opening a Roth IRA. In contrast to a pre-tax 401(k), money that goes into a Roth IRA is considered "post-tax." Once deposited, it will never be taxed again -- even when you withdraw the money in retirement.
Roth IRAs also offer great peace of mind in that you know the entire balance is all yours (by its tax-free nature), unlike a 401(k) or other pre-tax plan that carries an embedded tax liability in retirement.
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3. Become a do-it-yourself investor
Investing and saving for retirement is shockingly simple -- this is why it's recommended to learn the basic mechanics of how it all works. By avoiding exorbitant recurring fees charged by advisors or product salesmen, you'll allow your retirement funds to grow unimpeded.
Think of it this way: An airplane travels much faster when it doesn't have a gusting headwind right at its nose -- this is the appropriate analogy when it comes to your retirement dollars and corresponding fees. A minimal fee is one thing, but most investment products worth their while should be practically or literally free.
4. Leave it alone
Trying to "time the market" or "trade the market" will, in all likelihood, reduce your balance as opposed to grow it. Only a true, true minority of people are able to beat the market consistently over time. Playing the ups and downs and acting on emotion is exactly the wrong strategy for long-term investing.
This is one of the few avenues where the less work you do, the better off you'll be. Choose a few low-cost index funds, invest regularly, leave the funds alone, and enjoy your retirement when the time comes.
5. Roll over if necessary
After you leave a job, you may be wondering what to do with the money in your former employer's retirement plan. One option is to roll it over to an IRA, which might offer lower expenses and more investment options.
Sometimes, 401(k) plan providers can be unnecessarily costly and/or restrictive, so it's best to check on the specifics of your plan, as well as your rollover options. It may sound a bit complicated, but it's a very simple process that gives you more flexibility.
Small changes matter
By making a series of very minor changes to your mindset and your accounts, you will set yourself up for long-term success. It's really amazing to learn how impactful some of these decisions are, but they're worthwhile to investigate and activate. Keep these tips in mind as you continue on your wealth-building path.
