The Retirement Planning Rules You Should Never Break

Knowing how to maximize your savings can be pretty overwhelming when it comes to planning for retirement. At this stage of the game, should you invest in Bitcoin or pay down credit card debt instead of bulking up your 401(k)? Sometimes you have more questions than answers, but when it gets down to basics, there are retirement planning rules you should stick to and never break.

To start, financial experts say you should have about four times your annual salary saved by the time you reach age 45, but approximately 70% of Americans have less than $1,000 in their savings accounts, according to CNBC. The hard truth is retirement savings can be complicated and many people procrastinate, waiting for a time when they feel more financially comfortable.

Whether you were able to start saving in your 20s or embarked a little later in life, there are a few important rules to live by in order to maximize your money. Curious? Here are 10 rules every retirement saver should follow.

1. Contribute the max to your 401(k)

401K plan financials

Once you’re settled in a career, it’s important to max out your 401K. | GaryPhoto/iStock/Getty Images

Saving a few bucks in your 20s may have taken a Herculean effort, but once you reach your 40s, you should hopefully be able to comfortably contribute the maximum amount to your 401(k). That means meeting the max limit of about $18,500 if you are under age 50, Bankrate reports. And if your employer matches or contributes 50%, you are in even better shape.

While contributing the max toward retirement may not be as fun as using that money to buy a new car or go on a sweet vacation, its better than living with regret, especially once you are in retirement. One of the biggest regrets is not saving enough money especially when you thought you saved enough but missed the mark.

The old standard used to be that having $1 million in your retirement account would be enough, however, that rule may not meet today’s cost of living. Rather than shooting for $1 million, consider using the Rule of 25 where you multiply what you spend by 25 to estimate what you’ll need during retirement. So if you spend about $70,000 annually, you’ll need about $1.75 million in your retirement account, for instance.

Next: Leave your 401(k) alone.

2. Don’t take out a loan (or an early withdrawal) against your 401(k)

A senior couple looking out at the ocean

Don’t bet against your own retirement. | Yobro10/iStock/Getty Images

You may have plenty of reasons for borrowing against your 401(k), such as helping your child pay for college or making a down payment on a new home, but there are more reasons to resist the urge.

Even though the money is technically yours, borrowing against your 401(k) means you still have to pay back that money within five years, making payments at least once per quarter, according to the Motley Fool. If you can’t repay the loan within that time, you’ll have to pay taxes on the unpaid amount. Also, don’t discount the fact that if you decide to quit your job you’ll have to pay back the loan before you leave or be penalized further if left unpaid.

What about making an early withdrawal rather than taking a loan? If you are under age 59½ you’ll have to pay a 10% early withdrawal penalty in addition to federal and state taxes. Essentially after fees and taxes, the withdrawal you thought you were making will be considerably smaller so you only end up cheating yourself.

Next: Fortify your emergency account.

3. Have that emergency fund fully stocked

girl with dog ready for the travel

A rainy day fund can prevent you from dipping into your 401K |

One way to avoid borrowing against your 401(k) or maxing out credit cards is to have a fully stocked emergency fund (or even a special vacation fund). Having these types of funds will help you plan for retirement because they act as a safety net when new expenses crop up. You have access to cash but can stick to your savings retirement plan because the surplus money will cover unexpected expenses.

Although there is no real hard-and-fast rule for exactly how much you should have in an emergency fund, consider stashing between three to six months of your income in a high-interest savings or money market account. You can earn interest, while still remaining liquid.

Next: Opt for the Roth IRA.

4. Go for the Roth IRA

Investment And Saving Concept

A Roth IRA can make your retirement savings grow exponentially. | iStock/Getty Images

A Roth IRA over a traditional IRA makes the most sense if you are maximizing your retirement savings contributions, according to a 2017 Nerdwallet study. Those who made $5,500 in annual contributions could possibly make $100,000 more with a Roth than a traditional IRA over 30 years, analysts found.

While Roth IRA holders don’t get the tax deduction for contributions, as with the traditional IRA, you won’t have to pay taxes on Roth IRA withdrawals. If you are under age 50, you can contribute up to $5,500 and $6,500 if you are older than age 50.

Next: An HSA is a good option for retirement planning.

5. Tap into a Health Savings Account for savings

Older at doctor

HSAs are made up of pre-tax money. | Monkeybusinessimages/iStock/Getty Images

A Health Savings Account (HSA) allows you to save pre-tax money to cover health expenses, like a high deductible, for instance. The savings benefit with an HSA is any money you don’t use rolls over year to year, plus the account earns interest. This account differs from a flexible savings account (FSA) because you lose any money you don’t use during the year.

An additional retirement benefit is the “triple” tax benefit you obtain. “The money is tax deductible when you put it in, it grows tax-deferred and you can take it out tax-free if used for qualified medical expenses,” Sophia Bera, a financial planner, told CNBC’s Make It. Plus after you hit age 65, you can use your HSA savings for non-medical expenses too. The maximum amount you can contribute per year is $3,400 if you are single and $6,750 for families.

Next: Don’t spend your bonus. 

6. Save, don’t spend, your bonus or raise

house for sale

It’s incredibly important to live modestly. | Tim Boyle/Getty Images

While it is tempting to blow your next bonus or raise by putting in a new pool or upgrading your wardrobe, resist the urge and devote that money to making your future brighter. How can you maximize extra cash before it slips through your hot little hands? Consider beefing up your emergency fund for peace of mind, increasing automatic contributions to your 401(k) and sticking to your usual budget.

Staying the course and not allowing more money to change your lifestyle is considered to be a “rich habit,” according to author and finance expert, Thomas Corley. “The good habit — I call it the ‘Rich Habit’ — is to forgo the desire to spend your money today and, instead, sock it away into savings and investments that grow in value and provide financial resources that can be used in the future to maintain your standard of living,” he wrote in a Business Insider article.

Next: Refinance your mortgage for a lower rate.

7. Refinance your home

wells fargo home mortgage sign

It’s important to refinance your home when the rates drop. | Spencer Platt/Getty Images

Nothing lasts forever and that notion certainly applies to mortgage rates. Still low, the average 30-year fixed-refinance rate is 3.88% and the average 15-year fixed rate is 3.19%, Bankrate reports. But, the Federal Reserve raised rates three times last year and are planning to do so again in 2018, according to NPR.

That means now is the time to get off the sidelines and refinance your home if you haven’t already. If you pull the trigger on refinancing, how much can you save? Zillow offers a handy mortgage refinance calculator to assess your individual savings. A homeowner could save about $128 a month by simply refinancing a 30-year mortgage balance of $192,000 from a rate of 4.926% to 4.176%, for example. Any money you save can be dedicated toward one of your retirement accounts, which means more money in the bank.

Next: Don’t spend your retirement savings on college.

8. Be realistic about college expenses

Students moving in

When helping put a child through college, it’s important not to spend beyond your means. | mangostock/GettyImages

News about crushing student loan debt haunts parents who hope to help their child alleviate some of that stress. However, being realistic about what your family can reasonably afford will help you avoid derailing both your retirement goals and your child’s college dreams.

The good news about your Gen Z student is they’ve been paying attention to the student loan crisis and more students are placing a greater emphasis on value over prestige when pursuing their undergraduate degree. Nevertheless, if your child works hard to get into a prestigious (but expensive) school how can you both meet your goals?

First, do a budget check to determine exactly how much you can afford. “Do a quick calculation to see how much you’re currently saving for your retirement,” Jeff Rose, certified financial planner told USA Today. “If you’re doing a 401k and contributing 5%, how much is that monthly? A good rule of thumb is to make sure you’re not paying more for your kid’s college per month, no matter how you’re doing it, than you are saving for retirement.”

Next, dig into scholarship opportunities and financial aid to wrangle expenses. Additional options include exploring public schools or opting for a school that allows the student to live at home, which saves on room and board.

Next: Diversify your investments.

9. Embrace a good savings mix

Fidelitys Investments

Meeting with investment professionals will ensure you have a diverse portfolio. | jetcityimage/iStock/Getty Images

While your 401k should be a vital part of your retirement savings plan, you should also have a nice mix of stocks and bonds, especially if you are close, but not entirely ready to retire. A wise move is to maintain a portfolio that is about 80% stocks and 20% in conservative holding bonds, Ellen Rinaldi, Vanguards’ chief security officer told Bankrate.

The 80/20 is one approach but for those who feel less comfortable with the market, consider a more conservative strategy where the percentage of bonds in your portfolio equals your age, according to US News and World Report. Although maintaining 30% in bonds at age 30 may not work in your favor in the long run, it’s all about your risk aversion and ultimate savings goals.

Other avenues to explore is checking into old 401(k) accounts or other benefits you earned at previous jobs. Bankrate suggests rolling old 401(k) accounts into an IRA or another account of your choosing.

Next: Keep credit card debt under control.

10. Don’t allow credit card debt to derail your retirement savings

hands holding a fan of credit cards

Go easy on the credit cards. | Joe Raedle/Getty Images

No one wants to head into retirement with credit card debt. However, advises savers to resist the urge to pivot from saving for retirement to pay down credit cards. It makes more sense to keep contributing as much money as possible to your retirement account overpaying debts, especially if you are close to retirement or your employer offers a 401(k)-contribution match.

Even though you should be focusing on retirement savings, it doesn’t mean you should allow your credit card balance to fester. Pay the credit card debt that grows fastest, referred to as the avalanche method or pick off cards with the smallest balances first, working your way up to the big ones, called the snowball method. Of course, one smart move is to transfer high-interest card balances to a zero or lower interest rate credit card. Nerdwallet has a list of cards to explore.

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