Saving for retirement involves more than just putting money into a 401(k) account and hoping for the best. Using strategies that maximize savings and minimize taxes should help you achieve the retirement lifestyle you want and deserve.
Your nest egg consists of the money you set aside for retirement, along with investment earnings generated by that money. Your overarching goal should be to protect your nest egg by managing investment risks and utilizing appropriate investment strategies throughout your saving years and into retirement.
Here are 10 ways you can protect your nest egg and prepare for retirement.
- There are many ways to prepare for your retirement. Contributing to a 401(k) or similar account is just one of them.
- Make sure to contribute to any accounts that offer a contribution match by your employer.
- Educate yourself about social security and RMDs before you retire.
- Coordinate your retirement plans with your spouse or partner to optimize income.
- Plan for any major expenses (like elective surgeries or home improvement projects) and try to pay for them before you retire from your job.
1. Set Retirement Goals
Setting age- and risk-appropriate investing goals will help ensure you don’t find yourself trying to play catch-up later in life. You should, for example, front-load savings in your 20s to take advantage of the power of compound interest and employer matching with 401(k) retirement plans, even if it means not paying off your student loans early. The age at which you want to retire should also be a factor in determining your savings goals.
2. Sign Up for Employer-Based Savings
Employer-based retirement savings plans such as a 401(k), 403(b), and others will often be your main savings tools. Employer matching funds—try to find jobs that offer them—multiply your savings at no cost to you. Employer-based plans typically also provide automatic pre-tax savings withholding along with investment education and other tools.
3. Open an IRA
Traditional and Roth IRAs are helpful even if you also have an employer-based plan. IRAs can provide access to a wider variety of investments and the ability to save even more for retirement. Many financial advisors counsel their clients to have both types of IRA due to the unique tax status of each.
4. Keep Track of Withdrawal Rules
The magic age to withdraw funds from IRAs or borrow from your 401(k) without penalty is 59½. You will still owe income tax unless you withdraw from a Roth IRA or Roth 401(k).
Thanks to the SECURE Act, there are exceptions, including a $5,000 withdrawal allowance for each parent (for a total of $10,000) for a new baby or adoption. Still, unless you qualify, it’s best to avoid early withdrawal and the additional 10% tax penalty that comes with it. Besides, you lose that valuable compound interest from any funds you withdraw early.
5. Avoid Unnecessary Taxes
You don’t pay capital gains taxes on income from tax-advantaged retirement accounts, but you do pay regular income taxes at retirement. Jon Heischman of Heischman Financial Services recommends a strategy that includes placing low (or no) dividend-paying stocks in a taxable account and high dividend stocks and taxable bonds in a tax-deferred account.
Heischman suggests putting mutual funds that pay dividends and capital gains in a taxable account along with municipal bonds, which are not taxed at a federal (and sometimes even state) level.
At 50 years of age and older, you can add "catch-up" funds to your retirement accounts.
6. Build a Retirement Income Buffer
As you approach retirement, consider supplementing your income to provide a buffer against market fluctuations and unexpected expenses. This could include real estate in income property, additional investment accounts, starting a small business, or getting a part-time job. If any of these options appeal to you, it’s best to do your research and start making plans before retiring.
7. Time Retirement With Your Spouse
The rules for spousal benefits for Social Security are complicated. Know their ins and outs to protect your savings and avoid paying unnecessary income taxes due to poor timing when signing up for benefits. You and your spouse need to make sure you are both on the same page when each of you nears retirement.
While creating a plan for retirement, don't neglect making a will or family trust to ensure your wealth and assets are distributed the way you want them to be.
8. Create a Late-Career Strategy
At age 50, you are eligible to start making catch-up contributions to your retirement accounts. You won’t have the advantage of compounding, but you will likely be able to add to retirement savings without cramping your lifestyle. This is also an appropriate time to review your investment mix to make sure your risk tolerance matches the fact that you are getting close to retirement.
9. Plan for Major Expenses
Plan for major expenses such as home repair or expensive medical procedures before you retire. Whether you need a new roof or a new hip, do it while you still have a salary coming in and are covered by employer-provided health insurance. Make charitable contributions when your income is high, not after you retire, and you have less need for the deduction.
10. Navigate RMDs in Retirement
Continue to monitor your financial situation even in retirement. Make financially smart moves before required minimum distributions (RMDs) kick in at age 72, and make sure the spend-down plan for your 401(k) or IRA is aligned with your retirement dreams and goals.
The Bottom Line
Retirement is a time to relax and enjoy hobbies, family, and friends after a lifetime of labor, not a time for stress and uncertainty. Employing strategies like dedicating savings to your retirement account, investing in IRAs, and planning for major expenses before you retire, are all ways to help you protect your nest by getting—and staying—on track.
Your reward will be a safe, happy, and prosperous next chapter in your life. And a chance to start working on your bucket list.