Everyone wants more funds in their retirement accounts, but the reality is that if you throw away more money today, you can sacrifice your lifestyle. Sometimes that sacrifice is necessary, but it’s also a good idea to think about how you can get the best of both worlds. Here are five ways to save for retirement that shouldn’t be causing you to drastically change your lifestyle.
1. Increase your 401 (k) posts by 1%
As the graph below shows, a 1% change in premium can make a huge difference in your projected retirement balance, especially over a longer period of time. These projections assume no starting balance, a 30 year time horizon, and a salary of $ 50,000 in all scenarios.
| Contribution (%) | Contribution ($) | Return | Expected balance |
|---|---|---|---|
| 6% | $ 3,000 | 8th% | $ 367,038 |
| 7% | $ 3,500 | 8th% | $ 428,211 |
| 8th% | $ 4,000 | 8th% | $ 489,383 |
Author’s calculations.
This is an oversimplification as you will likely get wage increases along the way and stock returns will fluctuate. But it’s an easy way to see how even a 1% change in contribution to your employer plan can make a huge difference over time.
A 1% change won’t require a major lifestyle change, but it will definitely affect your ability to live comfortably in retirement.
2. Frontload of your Roth IRA
It is good practice to contribute as much as you can to your Roth IRA as early in the year as possible. This is true for two reasons:
First, the sooner you can deposit money into your Roth IRA, the sooner it can be put together tax-free. As we have often noticed, the time in the market matters. So the sooner you use tax-protected space, the better off you will be in the long run.
Second, there is a significant psychological benefit to knowing that you have already funded your Roth IRA for the year. This means there is no longer any budget required for this and you don’t have to sacrifice future nights to make sure your retirement account is where it needs to be.
Image source: Getty Images.
3. Invest as cheaply as possible
Another way to be well positioned for retirement is to cut fees wherever you can. It is common for young investors to inadvertently buy investments with high cost ratios or expensive sales charges. Steep expenses are unnecessary and should be removed from your investment portfolio as soon as possible.
Most broad-based index funds can be purchased at low or no cost, so it makes sense to read the fine print and know exactly how much you will pay for each investment you own. Research generally shows that low-cost index funds outperform most actively managed funds anyway. So you won’t miss a thing if you take the inexpensive route!
4. Look into a Solo 401 (k)
If you’re earning an income outside of your main job – or if you’re a freelancer – a Solo 401 (k) can help you save even more for retirement. While serving as both an employee and an employer, those under 50 are eligible to contribute to a Solo 401 (k) up to a maximum of $ 58,000 in 2021, while a traditional 401 (k) employer is only eligible for annual contributions of $ 19,500 allows. The limits for people 50 and older are $ 64,500 and $ 26,000, respectively.
Freelance work can improve your lifestyle, but you need to be incredibly disciplined and energetic if you choose to go this route. By focusing on the Solo 401 (k) contributions, you have the opportunity to save more for retirement while lowering your tax liability for the current year.
Retirement: so far and yet so close
Retirement may seem like a long time, but it will come sooner than you think. That is why it is especially important to seize every opportunity to save and start as soon as possible. By making a few small adjustments – and thinking outside the box – you can put yourself in a strong position when your golden years finally arrive.
