Saving for retirement doesn’t happen in one fell swoop.
It usually starts with baby steps: First you might enroll in a 401(k) or set up an IRA. Next it’s time to take advantage of any employer match available to you. And then you should seriously think about increasing your contributions periodically.
If you’ve taken some of these steps, congratulations — you’re ahead of the curve!
According to a recent Bankrate survey, nearly 40% of Americans haven’t even started saving for retirement. And the numbers don’t get much more encouraging with age: More than a quarter of those ages 50 to 64 admit to the fact that they don’t have a nest egg.
But starting to save is half the battle — there are other steps to consider taking to help maximize your retirement strategy and make every penny count.
That’s why we’ve rounded up six small, retirement-focused moves you can do today that could help build your nest egg savings down the line. Translation: Not only might these ideas help you save more, but they may also help you save smarter.
Small Move #1: Seek Out Low Expense Ratios
An expense ratio is a fancy name for the fee you pay when you invest in a mutual fund or ETF. It’s essentially the percentage of assets that a fund charges to cover its administrative and management costs.
And the more “actively” your account is managed — i.e., there is a person or team who is making trades to potentially boost your return — the higher that percentage tends to be. If your account is “passively” managed, meaning that it’s likely mirroring an index, like the S&P 500, it won’t usually require active trading. Therefore, your fee will likely be lower.
Expense ratios are seemingly small — they typically range anywhere from less than 1% to 2% — but they can have an impact on your investments in the long run.
Say you’ve invested $10,000 in a fund that has a 6% annual return and an expense ratio of 1.5%. In 25 years, that fee has cost you $13,339 in returns. By contrast, if that account had an expense ratio of 0.5% instead, that number goes down to $5,031. (Check out this Vanguard graphic for more on how expense ratios could affect your returns.)
The bottom line: “[Your expense ratio] should be below 1%. If it’s above that, consider looking at competitors to find a better deal,” says David Blaylock, CFP® with LearnVest Planning Services. “There are probably lower-cost alternatives that achieve the same investment objectives.”
If you’re not sure what your expense ratio is, call your provider to double check or read through your prospectus, which should have the details. Many companies make it hard to find, but legally, they must share their fee information.
And if you have a 401(k), switching providers may be harder because you’re limited to who your company uses. But you can at least talk to your human resources department about the possibility of finding one that offers lower-fee funds.
Small Move #2: Look Into Auto-Escalating Your Retirement Savings
Many experienced savers already take a “path of least resistance” approach to their retirement contributions by having a set percentage of their salary deducted from their paychecks and diverted to a 401(k).
This type of automation helps keep you from spending your retirement money, but it still leaves the job of increasing your savings up to you — a task that often falls to the priority wayside.
Luckily, “plans are beginning to add an auto-escalation feature, which can even coincide with your employer’s review cycle,” says Peter Macaluso, vice president of FM International, a retirement services company. “So when you’re due for a raise of 2% to 4%, you can auto-escalate your 401(k) deferrals by 1% or so at the same time. It’s a way to save more without feeling it in your pocket.” In fact, one study found that auto-escalation alone helped boost savings for some workers by up to 28%.
If your company doesn’t offer an auto-escalation feature, or if you contribute to an IRA instead of a 401(k), consider setting a periodic calendar alert (once every six months might be a good frequency) to remind yourself to review your contributions and see how much you can afford to boost your contributions.
Small Move #3: Roll Over Old Retirement Accounts
Whenever you start a new job, you’re likely also enrolling in a new 401(k) plan. And, for many people, that often means juggling two, three, four or more accounts at any given time.
Keeping separate 401(k) accounts can be annoying for two reasons. First, from an organizational standpoint, you have multiple sets of paperwork, online passwords and account balances to track. There’s also the fact that leaving your money in an old 401(k) means that you may not be in the loop on changes that a previous employer may have made to a plan since you left the company.
Second, if you keep separate accounts, you’re also paying separate fees. You’re being charged administrative fees for each account on top of the aforementioned expense ratios — costs that can eat into your returns. “Even if [your administrative fees] are just $30 or $40 per year, that’s still something,” Blaylock says. “Plus, you can monitor your investments more closely if they are consolidated in one place.”
So consider saving yourself some trouble by rolling everything into a single 401(k) account. Just be sure to do your homework on whether it’s better for you to roll over your old 401(k)s into your current one, or roll old balances into a single IRA — because a recent government report revealed that plan providers aren’t always up front about all of the options best suited for you.
Small Move #4: Find "Areas of Opportunity" in Your Budget
Keeping close tabs on your spending history can be useful for locating what Blaylock calls “areas of opportunity” for cutting back. Once you’ve pinpointed costs that can be trimmed, you can then consider transferring those savings into your retirement account.
If you don’t already, track your spending for about three months — or however long it might take to get a clear picture of your money — by using a spreadsheet, closely monitoring your credit card and bank statements, or by starting a free LearnVest.com account, which can track your spending for you.
Were there particular months when you went over budget or your spending seemed higher than usual? Next, review your transactions during those high-spending months to see if there’s a particular cost you could cut back on. Maybe there’s a recurring bill you can live without, such as a subscription service, or perhaps you’d be willing to cut back on dining out or entertainment.
“Is there something you don’t enjoy or use often?” Blaylock asks. “For example, my house alarm [service] is something I haven’t used in years. So, at one point, I asked myself, ‘Why am I still doing this?’ ”
Once you’ve isolated your own “areas of opportunity,” ask yourself: What is a need versus a want? Then see which “wants” you can eliminate, and consider putting that extra savings toward retirement. “Almost anyone can look at their budgets and try to find at least $50 extra per month,” Blaylock says.
Small Move #5: Adopt the Buddy System
Need extra motivation to push you to save smarter? This is where having some accountability can help.
Maybe you’re procrastinating rolling over your 401(k). Or perhaps you’ve been meaning to check your retirement portfolio to decide if you need to rebalance.
In the same way that a gym buddy can push you to do more reps, a money buddy — in the form of a friend, family member or financial adviser — can challenge you to be better with your finances, help you meet deadlines or just give you that extra shoulder tap to get a task done.
Instead of building fitness, you’re building your retirement-savings muscle.
Small Move #6: Play a Little "Catch Up"
Here’s one sweet benefit to getting older: If you’re at least 50, you can take advantage of catch-up retirement contributions — up to $5,500 to your 401(k) or $1,000 to your IRA (as of 2014) — over and above the standard contribution limits.
“The timing [of catch-up contributions] for a lot of people is great because, at that age, your kids are typically done with or almost done with college and you likely have more discretionary income,” says Bill Losey, CFP® and author of Retire in a Weekend. “Those catch-up contributions can make a substantial difference.”
And remember that no matter how old you are, you’re not limited to keeping just one type of retirement account. Indeed, you may have to contribute to more than one in order to meet your retirement goals, especially if you started saving later in life.
So if you max out your 401(k) every year and can afford to save more, check to see if you qualify to contribute to a Roth or Traditional IRA here. Or, you can consider opening a brokerage account to help make additional savings contributions.