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Saving for Retirement with Extra Income

by Nevena

One of the most important foundations of your financial future is saving for retirement. The government has provided tax advantaged accounts that allow you to save for retirement while deferring taxes on your earnings (or even watching your money grow tax free with Roth accounts). This allows you to grow your money more efficiently. One of the favors you can do yourself is to try to max out your retirement accounts.

Contributing the Limit to Your Retirement Accounts

One way you can make sure you are maximizing your retirement contributions is try to contribute the limit each year. At the most basic level, you can contribute up to $16,500 in a 401k and $5,000 in an IRA. This means that, combined, you can put $21,500 in your retirement accounts. (Be aware that certain phase outs apply, and that there are other retirement account options as well. The purpose of this piece is to give you a basic idea of what can be accomplished.)

Being able to put more in now can mean a better future later. Putting $500 a month total in your retirement accounts every month for 30 years will see you ending up with $610,244.38 if your annual return is 7%. However, if you put in your $21,500 maximum ($1,791.67 a month) each year, the story changes. Maxing out your account, you would end up with $2,186,709.04. Even with phase-outs, being able to max out your contribution would result in a much higher number when you are ready to retire.

Using Extra Income to Max Out Your Account

Of course, the difficulty is in coming up with enough money to more than triple your retirement account contribution. One way to do this is to cultivate extra income streams. You can use dividends paying stocks, start a side business that provides extra income, or start up a web site that helps you earn affiliate commissions and ad revenue. Put everything you get from these ventures into your retirement account.

It is true that things will be slow to start. It will mean that you can’t immediately max out your retirement accounts. So, while you might not get that $2 million figure, as you build up your retirement account earnings, you should be able to put away more than $1 million by the end. Make maxing out your retirement accounts a goal, and then put your extra income toward reaching that objective.

Your cash flow investments will also help during retirement. Even though you will no longer be putting your alternative earnings into a retirement account after you retire, the passive earnings that you have cultivated will provide an income that can continue even after retirement. This will help you stretch your nest egg out longer, putting you in a more secure financial position.

There is no reason not to eventually max out your retirement contributions. With an eye toward earning extra income, it’s possible to create a plan that results in a big nest egg, as well as a cash stream for the future.