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5 Time-Tested Tactics to Save for Retirement

Kiplinger - 04/11/2017

For the 70th-anniversary issue of Kiplinger's Personal Finance, we distilled our best advice to show you how to build, protect and enhance your wealth throughout your life. Start with these tips to save more for retirement:


1. Save early and often


The sooner you start to save, the easier it will be to amass a comfortable nest egg -- thanks to the power of time and the magic of compounding.

A 25-year-old who saves $450 a month in a tax-deferred retirement account and earns an average yearly return of 7% will have about $1.1 million by age 65. If the same investor waits until age 35 to start saving, she'd have to sock away $950 a month to reach roughly the same balance by age 65.

Try to save 15% of your income, including any employer match for your retirement plan. If that's not doable, put away as much as you can and increase the percentage as your income and budget allow.

"Getting started, even if you're saving 3% of your income or $10 a week, is the critical goal," says Molly Balunek, a certified financial planner in Cleveland. "Once you see progress, it becomes easier to save 1% more, or $5 more a week."


2. Make the most of employer incentives


For the slow-and-steady way to get rich, take full advantage of your company's 401(k). You can contribute up to $18,000 ($24,000 for people 50 and older) in 2017 to this pretax account; your employer may kick in another 4% to 6% of your pay, or even more.

Many companies enroll employees automatically, at a contribution rate of, say, 3% of their salary. But aim for 15% of your income, including the company match, from the beginning of your career until the end. If you have to cut back for a few years -- say, to buy a house or pay college bills -- try to kick in at least enough to get the full company match, and boost your contributions later to get back on track.

Teachers typically have access to 403(b) plans, which carry the same terms and benefits as 401(k)s but generally lack the breadth of investment options. Public-sector workers may be offered a 457 plan, which is also similar to a 401(k) plan but has a higher contribution limit for people within three years of normal retirement age, usually defined as the age when they can collect unreduced pension benefits.


3. Take stock of where you stand


Estimate the future value of your current savings and see how much more you'll need to save to hit your retirement goal. You could work with a financial adviser to make a plan, but in the meantime crunch the numbers with an online retirement savings calculator.


4. Write down a plan


Create a retirement budget, devoting one column to essential costs, such as housing and food, and another to discretionary expenses, including travel and hobbies. Factor in inflation for overall expenses, expected to be 2.4% over the next 20 years, according to the Congressional Budget Office.

Consider making a separate calculation for health care costs, which are likely to have a much higher rate of inflation; HealthView Services, which analyzes health costs, projects a 5.1% inflation rate over the next 20 years.

Match expenses to guaranteed income, including any pensions and Social Security payments, plus the annual amount you plan to draw from savings. If there's a gap, reconcile yourself to spending less -- or working longer. Staying in the workforce for a few extra years gives you more time to contribute to your retirement accounts. Plus, you have fewer years to finance once you do retire.


5. Supersize your contributions


If you're 50 or older, you can make catch-up contributions to your IRA and 401(k). In 2017, you can add $6,000 to your 401(k) above the $18,000 annual contribution limit, for a total of $24,000 for the year. You can stash an extra $1,000 in a traditional or Roth IRA beyond the $5,500 annual contribution limit, for a total of $6,500 for the year.

If you invest $24,000 in a 401(k) every year starting at age 50, you'll boost your retirement savings by more than $580,000 by the time you're 65, assuming your investments return 6% per year. If you invest $6,500 in your IRA during those years, you could amass more than $157,000 in your IRA in 15 years.

If you're self-employed, you can also step up savings. In 2017, you can contribute up to 20% of your net self-employment income (business income minus half of your self-employment tax) to a SEP-IRA, up to a maximum of $54,000. In a solo 401(k) plan, you can put aside even more money because you can contribute as both an employer and an employee. In 2017, the maximum contribution is $54,000, or $60,000 if you're 50 or older.

Copyright 2017 The Kiplinger Washington Editors, Inc.. All Rights Reserved.

The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.

Kiplinger and Fidelity Investments are independent entities and not legally affiliated.

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