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How to Use Your Paycheck to Plan Your Retirement

12/16/2015, 11:13 a.m.
When you think about saving money for your retirement, do you cringe or feel optimistic? For some people, saving creates ...

By: KYLE WINKFIELD

When you think about saving money for your retirement, do you cringe or feel optimistic? For some people, saving creates a feeling of accomplishment and pride. Others feel stress, even fear, because they haven’t begun to sock away savings.

Regardless of where you stand, one thing is certain: You deserve to feel secure. And using your paycheck to fund your future will start you on that path. So, put your savings on autopilot and watch your retirement savings flourish.

TAKE ADVANTAGE OF WORK RETIREMENT PLANS

Does your employer offer a defined contribution plan such as a 401(k), 403(b) or 457? Contributions from your paycheck go directly into these tax-advantaged savings vehicles so you don’t have an opportunity to spend it first. Also, many employers offer to match your contribution up to a certain percentage, which is like getting free money for your retirement.

If you’re already contributing to a defined contribution plan, also called a qualified plan, but feel you can save even more, you might want to consider funding a Roth 401(k) if your employer offers this option. Each of these plans offer different tax benefits. In a traditional 401(k), you contribute income pre-tax and then pay taxes on the funds when you withdraw the money in retirement. Roth 401(k)s are funded with post-tax income so you pay the taxes up front and then make withdrawals tax-free during retirement.

CONSIDER ALLOTMENTS

You can use an allotment to divvy up your paycheck and send a specific dollar amount to separate bank accounts at each pay cycle. This autopilot savings plan can be set up by your human resources department. Some people use this approach for short-term goals like saving for a vacation or longer-term goals such as saving for a down payment on a home.

You can also ask your bank to set up regular transfers from your paycheck to your savings account. Doing so eliminates the temptation to spend because the money is moved to your savings account without you even noticing.

TWEAK YOUR TAXES

Do you look forward to a significant tax refund in April? If you’re receiving a refund of more than $1,000, your W-4 tax forms might be in need of a tuneup. Review your tax status with a professional to determine whether you can increase your withholding allowances, which will also increase the money in your paycheck each pay period. You’ll get a smaller refund, but you can bank the extra money in your paycheck throughout the year.

Some workers don’t realize that a hefty tax refund means that they’ve overpaid their taxes, thereby granting the government an interest-free loan with their money. For those who choose to collect a big refund, consider depositing that check into a savings or retirement account.

DOUBLE THE TAX

Get creative with your approach to saving part of your paycheck so that when you’re tempted to splurge, you remember that you’re doing something good for yourself long term. For example, try using the tipping standard of doubling the sales tax to tip yourself and serve up a healthy nest egg. Look at how much of your paycheck is going to various taxes; total them and use that figure as a monthly savings goal.