7 Savings Tips If You're Under 40
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Get tips on how to get an early start saving for retirement
Take these seven steps now, to help ensure you'll have the savings you need in the future.
From the Merrill Edge Minute e-newsletter.
Key Points
  • Don't underestimate the potential power of saving early. Start saving as much as you can, as soon as you can.
  • If your employer offers a retirement plan, start contributing as soon as possible. If you can, contribute enough to meet any company match.
  • Once you start saving, challenge yourself to increase the amount you're setting aside as often as you can.
  • Get 7 Savings Tips If You're Under 40
Most people under 40 may think about saving and investing for retirement. But in the face of more immediate financial needs like mortgage payments, college loans and kids vying for a share of your paycheck, it's easy to let your retirement strategy fall to the bottom of your list of financial priorities. "In your mid-thirties, the temptation is to defer retirement savings because you won't need the money for another three decades," says Christopher Vale, senior vice president, Merrill Edge Product Strategy. So create your savings strategy now. The longer you wait, the more you'll need to put away each month to catch up later.
Starting early may help results
Trying to balance competing financial goals is a reality at every stage of life. Here are seven steps you can take to help you get on track to saving for retirement—even in your mid-thirties.
1. Pay yourself first.
"Treat your retirement savings as a monthly expense," suggests Debra Greenberg, director, IRA Product Management at Merrill Lynch. "Take that money off the top of your income and not from what's left at the end of the month." Then take a look at your budget to identify areas where you can cut back to free up more money to save. Paring down your expenses may not be as difficult as you think, Greenberg says. Try eating out less, she advises, and look for better deals on your cable or cell-phone service. Those savings can really add up.
2. Enroll in a 401(k) if you can.
If your employer offers a 401(k), enroll as soon as you can to take advantage of the benefits. In an employer-sponsored plan, your contributions are automatically deducted from your paycheck, helping you maintain the discipline to keep contributing. If you have a traditional 401(k), your contributions are taken from pretax dollars and taxed at distribution. In addition, some employers offer a Roth 401(k), which can be especially good for young investors. Although contributions to a Roth are taxed, withdrawals during retirement won't be if taken as qualified distributions, and your tax rate now is likely to be lower than it will be when you take money from the account.
Many employers will match a certain percentage of your contributions, so at a minimum, try to contribute enough to earn the full match. "An employer match is part of your compensation, so don't leave that money on the table," says Vale. And if you can, contribute the maximum amount allowed. See the table below for the current contribution limits.
3. Consider an IRA.
If your employer doesn't offer a 401(k) plan, or if you're contributing the maximum and want to save more, you can still invest in a traditional or Roth IRA (see the chart below for contribution limits).
For a Roth IRA, you contribute after-tax dollars, and you won't pay federal tax on your earnings when you withdraw them at retirement if they're taken as a qualified distribution. Note, however, that state tax may apply.
For a traditional IRA, you may be eligible for a tax deduction now, but you'll be taxed when you withdraw the assets later. This can be a big benefit if you're currently in a tax bracket that's higher than the level that you believe may apply during your retirement, when you'll have to pay tax on withdrawals. Ask a tax advisor which IRA is right for you.
Contribution Limits for Investors Younger than age 50
Aim to increase your retirement contributions up to the maximum allowed in your 401(k), IRA or other retirement plans.
Contribution Limits
  Younger than Age 50*
Traditional** or Roth IRAs
2016 and 2017 Maximum Contributions***
(deadline for 2016 is 4/18/17)
2017 Employee Contributions
(deadline for 2017 is 12/31/17)
* You are treated as being age 50 or older if you will turn age 50 or older at any point during the calendar year.
** Contributions to Traditional IRA accounts may be tax deductible. IRS annual modified gross income restrictions for head of household or single filer who participates in an employer retirement plan are $61,000 for 2016 and $62,000 for 2017. For married couples who participate in an employer retirement plan, it's $98,000 for 2016 and $99,000 for 2017.
Generally, married couples filing separately are not entitled to a deduction for contributions to traditional IRAs. However, if you are married and file separately but do not live with your spouse at any time during the year, your maximum deduction is determined as if you were a single filer.
If neither you nor your spouse is covered by an employer retirement plan, the maximum deduction is either $5,500 or $6,500, depending on whether you are age 50 or over.
*** IRA contributions for 2016 can be made through 4/18/2017. IRA contributions for 2017 can be made through 4/17/2018. If April 15th falls on a weekend or holiday, the deadline typically is the next business day. 401(k) contributions for 2017 can be made through 12/31/2017.
4. Increase your contributions whenever you can.
While it helps to contribute whatever you can, especially as you're starting out, some say that contributing as much as 15% to 20% of your income toward retirement may make sense. It can seem like a lot, but future costs of health care and inflation will likely require more than you think. If you can't contribute that much right now, stretch as far as you can, and make a commitment to increase your contribution when you get a raise or pay off a large expense. Even increasing it 1% or 2% regularly will add up over time. For 401(k) contributions, check to see whether your employer offers automatic increases.
Stretch your retirement amount
5. Be sure to factor in fees.
Fees are a normal part of investing but will vary from investment to investment, so consider them carefully as you make your choices. You may be holding these investments for many years, and high fees could diminish your returns over time.
6. Consider your consolidation options.
It's much easier to keep track of your retirement funds and monitor an overall asset allocation when all of your retirement accounts are in one place. If you've left retirement funds in previous employers' 401(k) plans, consider your choices for those assets. You might choose to leave those assets in your former employer's plan, move the assets to your current employer's plan, roll your assets to a traditional IRA, convert your assets to a Roth IRA, or take a cash distribution. Each choice may offer different investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment, and provide different protections from creditors and legal judgments. These are complex choices and should be considered with care.
7. Balance retirement plans with your other savings goals.
Saving for retirement is important, but so are other goals, such as creating an emergency fund and preparing to pay for a child's education. If you can balance your retirement goal planning while still enjoying today, you won't be tempted to try to cover expenses by dipping into your retirement savings — something you really don't want to have to do. Usually if you're under age 59½ and withdraw retirement account funds, you'll have to pay taxes on the amount you withdraw, along with a 10% additional tax. Ask your tax advisor about provisions for using funds for education or the purchase of a home, but be sure to also consider how withdrawing those funds can affect your retirement savings.
Once you have established a retirement savings strategy that makes room for your other financial priorities, you're on your way. Stick to your strategy, and monitor it regularly — at least every six months — to be sure your strategy aligns with your goals as they evolve. By the time you retire, you'll be glad you started saving as much as you did as soon as you could.
Next Steps
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1 Consult your tax advisor as there are phase-out ranges for IRA contribution deductibility based on the following:
  • Filing Status (married—filing jointly, married—filing separately, single, spousal IRA filing jointly)
  • Age
  • Participation in an employer plan or not