Maximizing Retirement Savings

One of the most important ways to save for retirement is using your employer-sponsored retirement plan. For those working in the private sector, that means saving money in your 401(K) or 403(B). For those in the military or federal civil service, that means saving in the Thrift Savings Plan (TSP).

When you save in your retirement plan, there are restrictions placed on access to some of this money. Therefore, the recommendations I make here are for those that want to maximize the growth of this type of savings.

1. If your employer offers a match, capture as much of it as possible. Each company has a different policy with regard to its retirement plan. Some offer a 100% match of employee contributions. Others don’t offer a match at all. Learn what your company’s policy is and aim to capture as much of the match as possible.

For example, if one company offers an annual match on 100% of your contributions, you could contribute your entire limit the first month of the year (assuming you have the pay) so the money can grow tax-deferred the entire year. If another company only matches your contributions monthly, then you want to space out your contributions each month so that you don’t hit your limit before the end of the year. If you hit your $19,500 annual contribution limit in November, you’ll be giving up a month worth of free matching money.

For military service members, the TSP matches contributions monthly, and combat deployments increase the limit you can contribute to the Traditional TSP. In order to capture the maximum match from the government, you may need to delay contributions so you don’t hit your limit before the end of the year. For more detail, refer to my article Understanding TSP Contribution Limits or my book The Blended Retirement System.

2. Use low-cost index funds to invest. If you are not a skilled investor, stick with low-cost index funds inside your 401(K) based on your risk tolerance. You might also use target date funds if you want to take the guesswork out of determining your risk tolerance. The TSP already has low-cost index funds, but many 401(K) funds charge slightly higher fees. Compare these fees and determine which are the lowest.

3. Maximize your after-tax return. When deciding between a traditional or Roth 401(K) or TSP, you want to maximize your after-tax return not minimize your taxes. This may involve minimizing your taxes, but it doesn’t necessarily.

Let’s use an example. If I’m currently in the 22% income tax bracket and I expect to be in the 24% bracket after retirement, I might plan to save in a Roth 401(K). This way, I pay the lower income tax now. My savings would then grow tax free. Theoretically, that would lower my tax bill.

However, if I save in a traditional 401(K), I might be able to contribute more because I’m saving on taxes right now. That additional contribution earns a higher match and compounds faster in a tax-deferred account. Once I reach retirement age, that retirement savings might be a lot bigger even though I’m paying a slightly higher income tax rate in retirement. Even if I pay higher taxes later, I still enjoy a higher standard of living and have a lot more savings and income.

If you’re having difficulty saving more for retirement, you can supplement your income by developing a great side-hustle. We’ve discussed this before, but it’s worth repeating. If you need some new ideas about earning money on the side, pick up a copy of the book The Side Hustle by Nick Loper. You can also join clickearners, which is an excellent method for earning extra cash working from home.

Additionally, if you want to take your financial certainty and success to the next level, I can help you directly when you join my membership program. We’ll develop an outstanding plan to prepare for your financial future.

Don’t forget to pick up copies of The Money MissionTax Saving Strategies and The Blended Retirement System.

Have a great weekend, and I’ll talk to you again soon!

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