It's no secret that most of us need to be saving for retirement. Indeed, fully 47% of American workers have less than $25,000 saved for retirement, per the 2017 Retirement Confidence Survey.
Thus, most of us need to start taking action as soon as possible, and for the best results, we should take advantage of retirement savings accounts such as IRAs and 401(k)s. Here are three smart ways to go about that.
You need to do more than just have an IRA or a 401(k) account and park some cash in it now and then. Unless you have a more powerful way to amass the money you need for retirement or you have a fat pension coming to you, it's hard to beat the power of IRAs and 401(k)s. Each comes in a "traditional" or "Roth" variety. Contributions to traditional accounts shrink your taxable income and defer taxation on that money until you withdraw it, typically in retirement. Contributions to Roth accounts are made with taxed dollars, but you get to make withdrawals in retirement tax free.
IRAs feature smaller contribution limits -- for 2019, the limit for most folks is $6,000, plus $1,000 for those 50 and older -- but they let you invest in just about any stock and gobs of mutual funds. 401(k)s feature much bigger contribution limits -- of $19,000 in 2019, plus $6,000 for those 50 or older -- but they restrict your investments to a limited menu, typically featuring a bunch of mutual funds.
Aim to save and invest generous sums -- and to select effective long-term investments, such as stock index funds. The table below shows how much you can amass if you regularly sock away various sums, earning an annual average of 8%:
Growing at 8% for
$10,000 invested annually
$15,000 invested annually
$20,000 invested annually
While a solid index fund or two can be all you need, consider adding some dividend-paying stocks as well. (Index funds will generally feature dividend income, too.) Why dividends? Well, obviously dividends can provide income in retirement. But even if you're far from retirement, you can still put dividends to good use: They can accumulate in your account and then be deployed into additional shares of stock. Note, too, that healthy and growing companies tend to increase their payouts over time, giving dividend income a good chance of keeping up with (or surpassing) inflation.
Below are some well-regarded dividend-paying stocks and their recent five-year dividend growth rates. Remember that a modest current dividend yield can be OK if it's likely to grow at a rapid rate over time.
Stock
Recent Dividend Yield
5-Year Dividend Growth Rate
To better appreciate the power of dividends, imagine a $400,000 portfolio invested in a bunch of healthy and growing dividend payers, with an average yield of 3%. That would kick out $12,000 annually in dividend income -- for you to spend in retirement or invest in more stock if you don't yet need the cash.
Finally, keep your eyes on the prize -- a substantial war chest for your retirement. Keep investing as much as you need to each year, and be sure to deploy those dollars into sound investments such as low-fee, broad-market index funds. Revisit the table at the top of this article and note that if you take a few years off from your investing regimen, you won't end up with nearly as much as you could have.
Don't borrow from your 401(k) or cash out your 401(k) prematurely, either, as that also shortchanges your financial future. Many of us change jobs every few years, so we end up with 401(k) accounts with only modest sums in them. It might seem inconsequential to cash out an account with just, say, $25,000 in it, but it probably isn't. If you're still 20 years from retiring and you let that money grow, earning an average annual return of 8%, it can grow to more than $116,000!
The more you learn about retirement -- and Social Security -- the better financial moves you'll likely make, and the more money you'll likely end up with in your golden years.
All Rights Reserved © 2024
