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Finding extra money is key for retirement saving, but it’s not the whole story. Once you have that cash in hand, you need to decide how to best use those funds to grow your wealth.
Everyone will have a unique approach based on their goals and timeline. But here are a few tips that can help anyone improve retirement readiness in 2023.
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1. Have a plan for where you’ll put your funds
Review all of the retirement accounts available to you and decide where you’ll place your contributions in 2023. A 401(k) is usually the best place to begin if you qualify for an employer match. Check with your HR department if you’re unsure how much you have to set aside to claim the full match. Then, put all your extra cash here first.
After you’ve claimed your 401(k) match, you can put your money wherever it makes the most sense for you. That could be a Roth IRA if you want to enjoy tax-free withdrawals in retirement. Or it could be a health savings account (HSA) if you don’t like the idea of locking up all your savings until retirement. You can also continue to save in your 401(k) if you like your account and the investments it offers.
Be sure to understand the rules for whichever retirement account you use. They all have annual contribution limits, and exceeding these could result in costly penalties. In addition, HSAs have eligibility requirements that prohibit those without a qualifying health insurance plan. These rules can change slightly over time, so you should always review them before putting money there for another year.
2. Automate your contributions
Once you know where you’d like your retirement savings to go, your next step is to eliminate the task of making contributions. Automate them so you don’t have to remember to set the money aside yourself each month or pay period.
You will probably have to do this if you want money withheld from each paycheck for your 401(k), but many IRAs also enable you to automatically transfer funds from a linked bank account on a schedule. This eliminates the risk that you’ll forget to make the contributions.
You should be able to choose how frequently you want money deposited, and you can change your automatic contributions at any time. If you plan to max out your retirement account for the year, be sure to halt your contributions when you reach the annual limit so you don’t incur any penalties.
3. Choose low-cost investments
Investments and retirement accounts charge fees that can eat into your savings’ growth over time. It’s not possible to avoid fees entirely when saving for retirement, but you can reduce how much you pay each year by choosing your investments carefully.
Index funds are one of the most popular low-cost investments because they enable you to quickly diversify your money among many companies. There are many index funds to choose from, each based on a popular market index, like the S&P 500. The funds essentially mimic the performance of that index, unlike actively managed mutual funds, where fund managers choose investments to try to beat the market.
With index funds, you’ll have expense ratios — annual fees that all shareholders pay — as low as around 0.02%. That amounts to $2 per year for every $10,000 you have invested in the fund. Some actively managed mutual funds, by contrast, can charge you $100 or more for every $10,000 you have invested each year.
But just because you want to minimize your fees doesn’t mean it’s always that easy. If you’re investing in a 401(k), for example, you’ll probably be limited to a few investment options your employer has pre-selected for you. These might not always be the most affordable or the best fit for your risk tolerance.
If you don’t like your investment options, you could either talk to your employer about adding more investment options or consider saving in an IRA instead. These accounts give you a lot more control over what you invest in and how much you pay in fees.
Don’t be afraid to adapt along the way
Having a retirement plan can keep you focused as 2023 continues, but don’t be afraid to alter your savings strategy if something isn’t working for you. Check every few months to see your progress toward your goals.
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