If you’re about a decade away from your goal retirement age but your savings are not where you want them to be, don’t panic. There are still opportunities for you to build up your nest egg over the next 10 years.
Pay Down Debt
Paying down debt now will allow your money to go further in retirement.
“I recommend paying off your highest-rate, non-deductible debt — such as credit cards — first,” said Katherine Tierney, CFA, CFP, senior retirement strategist at Edward Jones.
“Since this type of debt is likely to cost you more in interest than you can expect to earn on your investments, it may be better to prioritize paying down this debt ahead of increasing the amount you’re saving for retirement (except to maximize your employer match),” she said. “As you get to lower-interest-rate debt, you’ll have to consider the trade-offs of paying that debt down versus investing more for retirement.”
Max Out Your Health Savings Accounts
Any money you put into HSAs now can be used during your retirement.
“If you have a high-deductible health plan, consider maxing your health savings account (HSA) contributions and saving your HSA for retirement,” Tierney said. “HSAs are triple-tax-free when used for qualified health expenses, and healthcare is likely to be one of your largest expenses in retirement.”
The contribution limits for 2023 are $3,850 for individual coverage and $7,750 for family coverage, plus an additional $1,000 catchup for individuals ages 55 and older.
Consider Making Roth Contributions
If your goal is to maximize how much money you have in retirement, consider Roth contributions.
“One dollar contributed to a Roth account will result in more for retirement than one dollar contributed to a traditional retirement account, assuming they’re invested the same way,” Tierney said. “This is because you’ll have already paid taxes on your Roth contributions and can generally take distributions tax-free in retirement. You effectively prepay your taxes.”
While this can be a savvy move, before deciding to make these contributions, it’s important to take a big-picture look at your overall tax strategy.
“Keep in mind that this strategy won’t necessarily minimize your current year’s taxes or the taxes you pay over your lifetime, especially if you’re in your high-earning years,” Tierney said. “You may need to decide which is a higher priority for you — minimizing taxes or maximizing how much you have in retirement.”
Take Advantage of Catchup Contributions
“If you’re age 50 or older, you may be able to take advantage of catchup contributions,” Tierney said.
For 2023, catchup contributions limits are $7,500 for employer plans, $3,500 for SIMPLE IRAs and $1,000 for traditional and Roth IRAs. The SECURE 2.0 Act will also increase catchup contribution limits in future years. Starting in 2024, the catchup contribution limit for traditional and Roth IRAs will begin adjusting annually for inflation. And in 2025, individuals ages 60 to 63 will be able to make higher catchup contributions in employer plans and SIMPLE IRAs, equal to 150% of the age 50 catchup contribution limit.
Consider Making After-Tax Contributions to Your Employer-Sponsored Plan
Contributing more than the maximum amount to your 401(k) plan can be advantageous.
“If you’re already maxing out your 401(k), including catchup contributions, consider making after-tax contributions to your employer plan if your plan allows for them,” Tierney said. “With after-tax contributions, you pay taxes on the amount you contribute and your earnings can grow tax-deferred, but you’ll pay taxes on the earnings when you start taking withdrawals — plus a potential 10% penalty if taken before 59 ½.
“Unlike traditional and Roth contributions, after-tax contributions are not subject to the lower limit on salary deferrals, allowing you to save higher amounts,” she continued. “If your plan allows you to convert your after-tax contributions, that’s even better, especially if you convert immediately after making your after-tax contribution. Then, you’ll minimize any taxes on the conversion and your future earnings will grow tax-free. This is often referred to as a ‘mega backdoor Roth’ strategy.”
Use a Backdoor Roth IRA Strategy
“If you’re ineligible to make Roth IRA contributions because your earnings exceed the Roth IRA limits, you may be able to indirectly contribute to a Roth IRA through the backdoor Roth strategy,” Tierney said. “With the backdoor Roth strategy, you make nondeductible (after-tax) contributions to a traditional IRA, and then convert your contributions to a Roth IRA. Since the contribution is after-tax, you won’t pay additional taxes on the conversion of the contribution — however, any earnings on the contribution will be subject to taxes.”
You’ll want to be cautious in using this strategy, though.
“If you have existing pretax assets in any IRA, then you could end up with a higher tax bill than expected in the year you convert,” Tierney said. “It tends to work best for individuals who don’t already have pretax assets in an IRA. If you have pretax assets in any IRA, you may want to consult a tax advisor to determine when, or if, such a move makes sense for you.”
Diversify Your Investments
“The decade prior to retirement is a great time to take a closer look at overall portfolio asset allocation,” said Michelle Kruger, Ph.D., CFP, senior financial planner at Gratus Capital. “Diversified portfolios with a broad allocation across different types of market sectors and securities can be helpful in managing overall portfolio risk.”
Negotiate Your Salary and Benefits
While you’re still working, make sure you’re getting the most that you can out of these remaining years in the workforce.
“Negotiating salary and benefits can be difficult, but can also make a huge difference in wealth accumulation over time,” said Zachary Melone, CFP at Equitable Advisors. “Most companies would much rather pay a current employee, especially a productive one, a bit more rather than having to find and train a new employee. Although this may only be a couple percent here and there, the compounding effect this can have on your income over time is extremely significant.”
Make Sure You’re Maximizing Your Cash
In addition to maximizing the funds in your retirement accounts, make sure any cash you have is earning as much interest as possible.
“There are currently high-yield savings accounts, CDs and short-term government debt that all pay more than 4%,” Melone said. “Accounts such as high-yield savings accounts can be FDIC-insured and liquid up to a specific amount of withdrawals per month. Rather than having emergency funds sitting in traditional checking and savings accounts, you should look for opportunities to earn on your cash, as these rates may not be around forever.”
The extra money you save now can help you live securely in retirement.
“You should find ways to reduce expenses by cutting everyday spending or taking larger steps, such as downsizing your home,” said Jim Turner, executive vice president at UMB Bank.
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