The Best Ways To Build Wealth When Youre 10 Years From Retirement

If you're still ten years away from your target retirement age and your savings aren't as large as you'd like, don't panic. You can still build your nest egg over the next 10 years.

This is the best decision in terms of asset creation after 10 years of retirement.

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Debt repayment; Debt repayment

If you pay off your debts now, your money will last until you retire.

“I recommend paying off the highest-interest bad debts first, like credit cards,” says Katherine Tierney, CFA, CFP, chief retirement strategist at Edward Jones.

“Because this type of loan will likely cost more in interest than you expect to earn on your investment, it may be better to prioritize repaying this loan rather than increasing your retirement savings (beyond your employer's limit)” , he said. “Because you can get loans at lower interest rates, you need to consider the tradeoffs between paying off the loan and investing more in your retirement.”

Maximize your health savings account

Money invested in an HSA can now be used for retirement.

“If you have a high-deductible health plan, consider maximizing your health savings account (HSA) contributions and saving your HSA for retirement,” says Tierney. “An HSA is three times tax deductible when used for qualified health expenses, and health care could be your largest expense in retirement.”

The contribution limits for 2023 are $3,850 for individual coverage and $7,750 for family coverage, plus an additional $1,000 for those 55 and older.

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Let's consider the function of the chariot

If your goal is to increase the amount available to you in retirement, you should consider Roth contributions.

“A dollar deposited into a Roth account will provide $1 more in retirement savings than a dollar deposited into a traditional retirement account, assuming both are invested equally,” Tierney said. "That's because you've already paid taxes on your Roth contributions and can typically take tax-free distributions in retirement. You're essentially paying taxes up front.

While this can be a wise decision, it's important to look at the bigger picture of your overall tax strategy before deciding to make these contributions.

“Keep in mind that this strategy won't necessarily reduce your current year taxes or the taxes you'll pay over your lifetime, especially if you're in your high-income years,” Tierney said. “You may have to decide what your top priority is: minimizing taxes or maximizing the amount you have in retirement.”

Take advantage of recovery contributions

“If you are 50 or older, you may be eligible for catch-up contributions,” Tierney said.

For 2023, the catch-up contribution limits are $7,500 for employer plans, $3,500 for SIMPLE IRAs and $1,000 for traditional and Roth IRAs. In the coming years, the SECURE Act 2.0 will also increase the limit on catch-up contributions. Starting in 2024, catch-up contribution limits for traditional and Roth IRAs will be adjusted annually for inflation. In 2025, people ages 60 to 63 will be able to make larger contributions to employer plans and SIMPLE IRAs, equal to 150% of the catch-up contribution limit for people age 50 and older.

Consider making after-tax contributions to your employer's plan.

You may want to contribute more than the maximum amount to your 401(k) plan.

“If you have already depleted your 401(k) through catch-up contributions, you should consider making after-tax contributions to your employer's plan if your plan allows it,” Tierney said. “In the case of after-tax contributions, you pay taxes on the amount you contribute and your earnings may be tax deferred, but you pay taxes on the earnings when you start withdrawing them, plus a potential 10% if you earn them early Years yes receives a % penalty.

“Unlike traditional and Roth contributions, after-tax contributions are not subject to lower salary deferral limits, allowing you to save larger amounts,” he continued. “If your plan allows you to convert your after-tax contributions, even better, especially if you convert at the same time as paying your after-tax contributions. You then reduce your taxes on the conversion and your future income becomes tax-free. This is often called a “Roth is a huge backdoor” strategy.

Use the Backdoor Roth IRA strategy

“If you are not eligible to contribute to a Roth IRA because your income exceeds the Roth IRA limit, you may be able to contribute indirectly to a Roth IRA through a backdoor Roth strategy,” Tierney said. “With a backdoor Roth strategy, you make nondeductible (after-tax) contributions to a traditional IRA and then convert the contributions to a Roth IRA. Because the contribution is made after-tax, you pay no additional tax when the contribution is converted. However, all income from the deposit is subject to tax.

However, you must be careful when using this technique.

“If you have pre-tax assets in an IRA, you may have a higher-than-expected tax bill in the year you convert,” Tierney said. "This works best for people who do not yet have pre-tax assets in an IRA. If you have pre-tax assets in an IRA, you should consult a tax advisor to determine when and if this move makes sense for you .

Diversify your investments

“The decade before retirement is a good time to take a hard look at the asset allocation of your entire portfolio,” says Michelle Krueger, Ph.D., CFP, senior financial planner at Gratus Capital. “A diversified portfolio with a broad distribution across a variety of market sectors and securities can help manage overall portfolio risk.”

Discuss your salary and benefits

Make sure you make the most of the remaining years of your career as you continue to work.

“Negotiating wages and benefits can be difficult, but it can make a big difference in building wealth over time,” says Zachary Malone, CFP at Equitable Advisors. “Most companies prefer to pay a certain salary to a current employee, especially if the employee is productive.” Much more than simply finding and training new employees. Even if it's just a small percentage here and there, the cumulative impact it can have on your income over time is significant. "

Make sure you maximize your money

In addition to maximizing your retirement account balance, make sure the money you have earns as much interest as possible.

“Right now, there are high-interest savings accounts, CDs and short-term government loans that all pay more than 4%,” Malone said. “Accounts such as high-yield savings accounts are FDIC insured and provide cash withdrawals up to a certain amount each month.” Instead of keeping an emergency fund in traditional checking and savings accounts, look for ways to earn money, because these interest rates may not last forever.

Cut costs

The extra money you save now can help you live more securely in retirement.

“You should find ways to reduce costs by reducing everyday expenses or taking big steps like downsizing your home,” said Jim Turner, executive vice president of UMB Bank.

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This article was originally published on GOBankingRates.com: The Best Ways to Build Wealth 10 Years After Retirement

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