Step 5: Boost Your Retirement Savings
The extra bump in retirement savings that you need to make now depends on your age, the amount of savings you already have, and your anticipated costs for later in life. Use the retirement-savings calculator at Kiplinger.com to find out your monthly savings goal. If possible, save the legal maximum every year: $16,500 for a 401(k) or $5,000 in an IRA. If you’re 50 or older, you’re allowed to make so-called catch-up contributions—additional annual deposits of up to $5,500 in a 401(k) or $1,000 in an IRA. Once you’ve been hitting your target for a year or more, go ahead to the final step.
Keep in mind that funding your retirement should be a high priority—even higher than saving for your kids’ college education. You may have heard this before, but it bears repeating: You can borrow for college, but you can’t borrow for retirement. “For one, federal financial-aid formulas don’t include retirement savings when determining the amount of aid your child receives, so you won’t be penalized for having a large fund,” says Joseph Hurley, an accountant and the founder of Savingforcollege.com, a college-planning website. Plus, you can withdraw money from retirement accounts and use it to pay for college expenses without incurring a penalty. You will, however, have to pay income tax on any money you take out.