Not all of us can have an IRA account worth $5bn like that of Peter Thiel. The PayPal founder was able to build a pot of tax-free retirement savings by holding onto pre-IPO shares of his company which accrued in his Roth IRA.
Hitting the billion or even million-dollar target may seem like an impossible target for many of us. However, this should not in any way dampen our zeal to boost our retirement accounts. While we are expending our energy in our productive years, we should always constantly remind ourselves of the inevitability of age catching up. The reality is that there will come a time when we will no longer be as productive.
With a third of Americans postponing their retirement due to unforeseen economic circumstances such as the pandemic, it is obvious not many people would be able to retire happily without worrying about their financial state.
The above underscores the importance of boosting our retirement accounts to fund the type of lifestyle we want when we are no longer able to work. We have outlined strategies to boost your retirement nest egg. Let’s have a look at them.
- Plan for the end from the beginning
The reason we don’t have that photo finish retirement is because we fail to plan for the end from the beginning. We don’t take cognizance of the type of retirement we want and like to seduce ourselves into thinking we would live young forever. Given the plethora of opportunities for instant gratification, prioritizing future goals can seem like a far-fetched target.
This is why we don’t take advantage of time and reap the benefits of compound interest when we are young. Most people begin to save for their retirement in their middle age, thus losing precious time which would have been used to build a huge nest egg when we were younger.
75% of Americans have no retirement finance knowledge, while 64% would retire broke.
If we envisage the end from the beginning we would start planning for our retirement early and thereby build a bulging account. Small contributions added over time would grow our retirement account substantially.
- Invest in stocks
IRAs allow you to choose from a plethora of investment vehicles such as stocks, bonds, certificates of deposit, exchange-traded funds (ETFs), and mutual funds. Most people prefer to choose the safety of mutual funds, while some leave the decision to a low-cost robo-advisor — a computer-powered investment manager — to choose the investment that would be suitable for the retirement account.
However, one way you can boost the contributions in your IRA account is by investing in stocks. Though stocks carry higher risk and potential of loss than other investment options, the chances of scoring exponential gains are equally higher, if you know which stock to choose.
The S&P 500 has increased by over 200% in the last 10 years. The average annualized return in this period is 12.5%. If you had invested a one-time amount of $10,000 in the S&P 500 index fund in 2010, your returns would amount to $29,866 in 2020. An annual investment of $1000 would amount to over $20,000 as of 2020.
As such, rather than lodging your money in slow-moving mutual funds or boring bonds, or making the rookie mistake of allowing your funds to lay idle in your retirement account, why not put that money to work by investing in stocks.
Since you are building a nest egg for your retirement, you would have a long-term view position on your stocks thus making you accrue more gains by just sitting tight and not selling. A $1000 investment in Apple shares made 10 years ago would be worth $11,149.68 as of July 2021.
- Converting to a Roth IRA
Depending on your tax bracket, it may be more advantageous to convert an existing traditional IRA to a Roth IRA. If you’re likely to be in a higher tax category when you are retired than presently, then converting to a Roth IRA is one way of boosting your retirement savings.
For example, let’s say you are in the 22% marginal tax bracket and want to convert a $50,000 traditional IRA. To do that you would have to shelve at least $11,000 in tax payments. However, you’ll owe no tax when you withdraw out of your Roth IRA in the future. The main thing is either choosing to take the hit now or later.
Given the uncertainty of the future, coupled with rising inflation, it would be better if you took the hit now. Plus, since there would not be any further tax deductions, the amount in your Roth IRA can compound even more than if it was in a traditional IRA.
- Make contributions before tax day
Growing your retirement account is a function of two things – time and capital. If you have more of any of these factors, there is every chance you would outperform someone who has less of these factors. Since we don’t have total control of how much capital we would be willing to save towards retirement, we can take advantage of an equally important resource – time.
By taking advantage of any little time, we allow our retirement account to grow further. One way to use the time to our advantage is not waiting until tax day before contributing to your IRA. Many people make the mistake of contributing to their IRAs when they are filing their taxes, usually on April 15 of the following year. By doing this, you would have valuable time (15 months) which would have made your contribution grow.
Contributing to your retirement account at the start of the tax year allows the amount to grow over a longer period due to the effects of compounding. If you can’t chunk a large amount, you can make small monthly contributions which still gets you to your destination and is easier on your budget.
- Name a beneficiary
Naming a beneficiary for your IRA allows it to keep growing even after your death. If you skip naming a beneficiary, the proceeds of your retirement account could be subject to probate fees. Creditors could be paid from your retirement account, plus the tax-deferred compounding of your contributions will be cut short thereby reducing the amount of money you can accrue.
Adding a beneficiary allows the recipient to stretch out the tax deferral by taking distributions over their lifetime rather than a lump-sum payment. The beneficiary can opt to rollover your IRA into a new account and won’t need to take distributions until they have clocked 72years of age. If the beneficiary is your spouse, the person can easily name another beneficiary which recalibrates the distribution requirement.
Thus, the proceeds of your retirement today can be used to set your beneficiary and descendants on a sound financial footing long after you are gone. You can always check with your financial advisor to seek advice on the most tax-efficient tax strategy.
Final Word
Planning for your retirement takes years. It entails having a long-term view of what type of life you would want to live when you are no longer productive. It also sets the mind at ease knowing that after you have spent the best years of your life toiling, you can equally enjoy a well-deserved rest and live the life you want without being a financial burden to other people. Time is of the essence in retirement planning. The longer you make contributions, the more amount you are able to accrue over time. But even in the absence of time, knowledge of which investments to make and how to reduce tax deductions on your contributions equally help to boost your retirement accounts. When planning for retirement, the saying: better late than never, is an infallible truth. The best time to start contributing towards your retirement was yesterday, the next best time is now.
Photo by Harli Marten on Unsplash
