When planning for retirement, the truth is that the earlier you start saving and investing, the better off you’ll be, thanks to the power of compound interest. And even if you began saving late or have yet to begin, it’s important to know that you are not alone, and there are steps you can take to increase your retirement savings. “It’s never too late to get started,” says Debra Greenberg, director, IRA product management, Bank of America Merrill Lynch.
Consider the following tips, which can help you boost your savings — no matter what your current stage of life — and pursue the retirement you envision.
1. Focus on starting today
Especially if you’re just beginning to put money away for retirement, start saving and investing as much as you can now, and let compound interest — the ability of your assets to generate earnings, which are reinvested to generate their own earnings — have an opportunity to work in your favor. “The more you can invest when you’re young, the better off you’ll be,” Greenberg says.
2. Contribute to your 401(k)
If your employer offers a traditional 401(k) plan, it allows you to contribute pre-tax money, which can be a significant advantage. Say you’re in the 15% tax bracket and plan to contribute $100 per pay period. Since that money comes out of your paycheck before taxes are assessed, your take-home pay will drop by only $85. That means you can invest more of your income without feeling it as much in your monthly budget.Footnote 1 If your employer offers a Roth 401(k), which uses income after taxes rather than pre-tax funds, you should consider what your income tax bracket will be in retirement to help you decide whether this is the right choice for you. Even if you leave that employer, you have choices on Learn about what to do with your 401(k).
3. Meet your employer’s match
If your employer offers to match your 401(k) plan, make sure you contribute at least enough to take full advantage of the match, Greenberg says. For example, an employer may offer to match 50% of employee contributions up to 5% of your salary. That means if you earn $50,000 a year and contribute $2,500 to your retirement plan, your employer would kick in another $1,250. It’s essentially free money. Don’t leave it on the table.
4. Open an IRA
Consider establishing an individual retirement account (IRA) to help build your nest egg. You have two options: Learn about our Traditional IRA may be right for you depending on your income and whether you and/or your spouse have a workplace retirement plan. Contributions to a Traditional IRA may be tax-deductible (see Learn about potential tax deductibility for any contributions you make to a Traditional IRA) and the investment earnings have the opportunity to grow tax-deferred until you make withdrawals during retirement. If you meet the income eligibility requirements, Learn about our Roth IRAs may be a good choice for you.Footnote 2 They are funded with after-tax contributions, so once you have turned age 59½, qualified withdrawals, including earnings, are federal-tax-free (and may be state-tax-free) if you’ve held the account for at least five years. To determine what type of IRA would work best for you, go to Use our selector tool to Find out which IRA may be right for you and also check the Contribution Limits chart, below.
5. Take advantage of catch-up contributions if you are age 50 or older
One of the reasons it’s important to start saving early if you can is that yearly contributions to IRAs and 401(k) plans are limited. The good news? Once you reach age 50, you’re eligible to go beyond the normal limits with catch-up contributions to IRAs and 401(k)s.Footnote 3 So if over the years, you haven’t been able to save as much as you would have liked, catch-up contributions can help boost your retirement savings. Take a look at the chart, below, for contribution limits for individuals over the age of 50.
Aim to increase your retirement contributions up to the maximum allowed in your 401(k), IRA or other retirement plans.
6. Automate your savings
You’ve probably heard the phrase “pay yourself first.” Make your retirement contributions automatic each month and you’ll have the opportunity to potentially grow your nest egg without having to think about it, Greenberg says. The Merrill Edge® Make automated regular contributions to your IRA by using our Automated Funding Service allows you to automate regular contributions to your Merrill Edge® IRA from another account at Merrill Edge, Bank of America or other financial institution. You can also automate your investment selection with the Merrill Edge Automatic Investment Plan, which invests assets automatically in specific funds.Footnote 4
7. Rein in spending
Examine your budget. You might negotiate a lower rate on your car insurance or save by bringing your lunch to work instead of buying it. Merrill Edge® has an online Determine where your money is going by using our budget worksheet and Determine where your money is going by using our cash flow calculator that can help you determine where your money is going — and find places to reduce spending so you have more to save or invest.
8. Set a goal
Knowing how much you’ll need not only makes the process of saving and investing easier but also can make it more rewarding. Set benchmarks along the way, and gain satisfaction as you pursue your retirement goal. Use the Merrill Edge®Find out if you’re on track for retirement by using our Personal Retirement Calculator to help determine at what age you may be able to retire and how much you may need to invest and save to do so.
9. Stash extra funds
Extra money? Don’t just spend it. Every time you receive a raise, increase your contribution percentage. Dedicate at least half of the new money to your retirement plan. And while it may be tempting to take that tax refund or salary bonus and splurge on a new designer purse or a vacation, “don’t treat those extra funds as found money,” Greenberg says. She advises that you treat yourself to something small and use the rest to help make big leaps toward your retirement goal.
10. Consider delaying Social Security as you get closer to retirement
“This is a big one,” Greenberg says. “For every year you can delay receiving a Social Security payment before you reach age 70, you can increase the amount you receive in the future.” Age 62 is the earliest you can begin receiving Social Security retirement benefits, but for each year you wait (until age 70), your monthly benefit will increase, and the additional income adds up quickly, as the chart below shows. Pushing your retirement back even one year could significantly boost your Social Security income during retirement.Footnote 5