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 steps now to help make sure 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
  • Print the PDF 7 Savings Tips If You're Under 40
Most people under age 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. At the same time, though, the longer you wait, the more you'll need to put away each month to catch up later. So create your savings strategy now.
Starting early may help results
Source: Merrill Lynch Wealth Management, Retirement Strategies group.
Trying to balance competing financial goals is a reality at every stage of life. So even though retirement may be decades away, it's never too early to start investing, even just a small amount at a time. Here are seven steps you can take to help you get on track to saving for retirement.

1. Pay yourself first

"Treat your retirement savings as a monthly expense," suggests Debra Greenberg, director, IRA Product Management at Bank of America Merrill Lynch. "Take that money off the top of your income and not from what's left at the end of the month. Then look at your monthly spending habits and think about ways to free up cash," suggests Greenberg. Paring down your expenses may not be as difficult as you think, Greenberg adds. Sacrificing small luxuries can add up to big savings when spread across an entire year.

2. Enroll in a 401(k) if you can

If your employer offers a retirement plan, enroll as soon as you can to take advantage of the benefits. In an employer-sponsored plan, such as a 401(k), your contributions are automatically deducted from your paycheck, helping you maintain the discipline to keep contributing.
If you make Traditional 401(k) contributions, they are taken from pre-tax dollars and taxed when you take distributions. Remember that before-tax 401(k) contributions reduce your current taxable income, potentially reducing the taxes you pay in the year when you make the contribution, and can help make your contributions seem easier to swallow.
If you make Roth 401(k) contributions, they are made with after-tax dollars. So, you forego the tax reduction now, but any future earnings over the many years before retirement are generally tax-free if withdrawn after age 59½ and five years after you first made a Roth contribution to the plan. This is true for both federal and, in most cases, state income taxes. This can be especially good for young investors since your tax rate now may be lower than it will be in the future and because you have many more years of potential earnings growth.
If your employer offers a retirement plan that matches your contributions, you should try stretching to contribute at least enough to earn the full matching amount. "An employer match is part of your compensation, so don't leave that money on the table," says Vale. That match is like getting an instant return on your investment and like getting extra pay from your employer. So if you can, contribute the maximum annual amount allowed.
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.
Maximum contributions for 2017
401(k)s $18,000
Traditional2 or Roth3 IRAs $5,5004
For 2017, the contribution deadline for IRAs is expected to be 4/17/18 and for 401(k)s is 12/31/17. Consult your 401(k) plan document or summary plan description for other limits that may apply on contribution timing or amounts.

3. Consider an IRA

If your employer doesn't offer a retirement plan, or if you're contributing the maximum amount and want to save more, you may still be able to invest in a Traditional or Roth IRA.
For a Roth IRA, you contribute after-tax dollars, but you won't pay federal income tax on your contributions or earnings when you withdraw them at retirement if they're taken as a qualified distribution. Note, however, that state tax may apply.5
For a Traditional IRA, your contributions may be tax-deductible now6 and your account's earnings are tax deferred. When you retire, withdrawals are taxed as regular income. 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.
See the table above for current contribution limits and ask a tax advisor which IRA may be right for you.

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 retirement contributions by just 2 percentage points regularly will add up over time. For 401(k) contributions, check to see if your employer's plan offers automatic increases.
The impact of increasing your retirement contribution

5. Be sure to factor in fees and expenses

Fees and expenses 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 your 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, 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 an IRA
  • Convert your traditional assets to a Roth IRA
  • Take a cash distribution
Each choice presents different benefits and limitations with regard to investment options and services, fees and expenses, withdrawal options, required minimum distributions, and tax treatment, as well as provides different protections from creditors and legal judgments. These are complex choices and should be considered with care. Learn more about these choices.

7. Balance retirement goals with your other financial priorities

Investing for retirement is important, but juggling retirement with other goals, like creating an emergency fund, preparing to pay for a child's education or purchasing a house or car, can be challenging. If you address all of your goals at the same time, giving more or less emphasis to each one as money and timing permits, you're more likely to achieve them. But try not to forget the importance of always keeping retirement savings top of mind.
In addition, don't let yourself be tempted to cover everyday expenses by dipping into your retirement savings since this can have a long-term impact on your retirement goals. Plus, generally if you're under age 59½ and withdraw traditional pre-tax funds from a retirement account, 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 once a year — 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

1 This example is hypothetical and does not represent the performance of a particular investment. Results will vary. Actual investing includes fees and other expenses that may result in lower returns than this hypothetical example.

2,6 Consult your tax advisor as there are phase-out ranges for Traditional IRA contribution deductibility based on your age; tax filing status (married-filing jointly, married-filing separately, single, head of household, qualifying widow/widower); modified adjusted gross income and whether or not you participate in an employer-sponsored retirement plan.

3,5 Consult your tax advisor as there are phase-out ranges for eligibility to contribute to a Roth IRA based on your tax filing status and modified adjusted gross income.

4 If your taxable compensation is less than $5,500, your IRA contribution limit for the year is the amount of your taxable compensation. Special rules may apply for married taxpayers if one spouse does not have sufficient taxable compensation to make the maximum $5,500 contribution.

7 Dollar figures are rounded to the nearest hundred. This illustration assumes a salary of $75,000, pre-tax contribution rates of 6, 8 and 10%, with those contributions made at the beginning of the month and a 6% annual effective rate of return. Hypothetical results are for illustrative purposes only and are not meant to represent the past or future performance of any specific investment vehicle. Investment return and principal value will fluctuate and when redeemed the investments may be worth more or less than their original cost. Ordinary income taxes are due upon withdrawal. Withdrawals prior to age 59½ may also be subject to 10% additional tax.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Past performance is no guarantee of future results.

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