- Your "final stretch" to build retirement savings is critical.
- Dollar-cost averaging can help build savings and reduce risk.
- Consider increasing contributions as your salary increases.
- Early withdrawals can trigger taxes and other penalties.
The years just prior to retirement are your final opportunity to build up savings. That means sticking to your savings strategies and saving more when possible. The following techniques, some of which you may already be using, can help.
Pay yourself first
Some people plan to save "what's left" after all their expenses. The problem is that without careful planning, there may not be anything left. Instead, pay yourself first by making automatic payroll deductions into your employer retirement plan and/or automatic monthly withdrawals from your checking account to your IRA.
Take advantage of dollar-cost averaging
Dollar-cost averaging simply means that you contribute the same amount of money to your retirement plan on a regular basis. This approach is easy, because you don't have to make any investment decisions each month. Plus, it can help reduce the risk of trying to pick the best time to invest since, over time, the average cost of your shares will usually be lower than the average price of those shares.
|Regular Investment||Cost Per Share||Shares Purchased|
|$500 (each month)||$25||20|
|$2,500 Total||Avg. Cost/Share = $17.85||140 Total Shares|
Contribute more as your salary increases
The next time you get a salary increase or bonus, dedicate some or all of it to retirement savings – before you get used to having the extra money.
If you have already maxed out your pre-tax contributions, consider contributing to another investment or savings account.
Contribute for as long as possible
Retirement investing is a good habit that you should continue for as long as possible. If you have earned income in a given tax year, there is no age limit for contributing to a Roth IRA or an employer-sponsored retirement plan. You can only contribute to a traditional IRA until the year before the year you turn 70 1/2.
Avoid early withdrawals
Although you can withdraw money from an IRA account before you reach age 59 1/2, it's generally not a good idea. For starters, you'll have to pay taxes and possibly a 10% IRS early withdrawal penalty on earnings and pre-tax contributions that are withdrawn. You also risk your retirement savings goal in two ways: You may not be able to replace the assets, and even if you can, you may miss out on years of growth.
For other (non-IRA) types of retirement plans, you cannot take an early withdrawal unless you reach age 59 1/2 or over, leave your job, or qualify for a hardship distribution. If you leave your employer prior to the year you turned 55 and you are not yet 59 1/2, you may have a penalty to pay in addition to income tax. If you are still working for your employer, you may have a loan option available however.
Dollar-cost averaging does not assure profits and does not protect against loss in declining markets. Since dollar-cost averaging provides for continuous investments, regardless of fluctuating prices, investors must consider their financial ability to continue to invest during low price levels.
Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.