3 Ways to Supercharge Your Retirement Savings

Building Your Net Worth Is Easier With These Three Investing Strategies

3 Ways to Supercharge Your Retirement Savings
If you have more than 10 years before retirement, there are a few strategies you can implement that could add tens of thousands, or even hundreds of thousands, in extra net worth to your family's balance sheet. pixdeluxe / E+ / Getty Images

A lot of digital ink has been spilled over the years writing about saving for retirement.  Aside from the usual stuff - keep your costs low, don't invest in things you don't understand - there are three ways to supercharge your wealth building so your final act in life is surrounded by prosperity and stress-free living; financial independence from worry as your money earns money for you.

1. Combine the Twin Powers of a Roth 401(k) and a Roth IRA for the Ultimate Retirement Tax Advantages

Ideally, if you qualified and put aside enough money to matter in terms of influencing your tax brackets when you go to make withdrawals later in life, the single best tax shelter setup for most investors, under most circumstances, is likely a combination of a Roth 401(k) and a Roth IRA.

 Almost anybody can open a Roth IRA at a discount brokerage firm but with the Roth 401(k), you either have to be fortunate enough to work for a business that offers one (if they don't, throw a fit until they do - there's no justification for not having it on the menu of retirement account options in this day and age) or be self-employed so you qualify for an individual Roth 401(k).

Both of these retirement accounts allow you to contribute after-tax dollars (that is, you don't get to take a tax write-off for the amount you kick in each year up to the contribution limits, unlike the traditional IRA and regular 401(k) counterparts), but, under the rules currently in effect, you 1.) Never have to pay a penny in taxes on the capital gains, dividends, interest, rents, or other income generated on the assets or securities held within the account itself, provided all of the rules are followed, 2.) you can avoid taking mandatory required distributions (RMDs) once you reach 70.5 years old on the Roth IRA, allowing you to compound your money tax-free for longer (unfortunately, you are required to do so on your Roth 401(k) plan), and 3.) if you die, your heirs can enjoy between 5 and 6 years of additional tax sheltering for themselves, depending on the exact timing of your death, by rolling over the proceeds into an inherited IRA.

If you're a really obsessive retirement investor who wants to keep everything you can out of the government's hands, and you qualify (not everyone will), you can add a pseudo-Traditional IRA in the form of a Health Savings Account, or HSA, on top of this to capture even more annual contribution limits that can add up to some real money by the time you reach your golden years.

 That is a more complex topic beyond the scope of this article.

2. Sign Up for Escalating 401(k) Contributions So Any Annual Pay Raises Are Allocated To Your Retirement Portfolio Automatically

Most major employers offer, at a bare minimum, an annual inflation adjustment to your paycheck.  It may not be much, and it may not even keep you at purchasing power equivalence, but you can effectively arbitrage these bumps by going down to the Human Resources department and asking to sign up for what are known as escalating 401(k) contributions.

You might say something like, "I want you to withhold 5% of my paycheck, then increase that amount by 2% of my paycheck every subsequent year until you're withholding 15% total.  For example, this year, you'd withhold 5%.  Next year, you'd withhold 7%.  The year after, you'd withhold 9%.  This will continue until, by year 6, you're taking the full 15%."  If they act like this isn't possible, you might want to keep pressing because most firms should have a mechanism to accommodate this request, which many workers don't even know exists.

Done correctly, you probably won't even notice any lifestyle difference.  Do it early enough in your career, those small incremental adjustments can result in tens of thousands, or even hundreds of thousands, of extra dollars in surplus wealth that you otherwise wouldn't have had.

 It goes back to the old saying made famous by Overeaters Anonymous: "Out of sight, out of mind."  It's as true for money as it is for food.  As a matter of fact, this is the secret behind the "Pay Yourself First" strategy that works so well for many retirement savers.

3. Build Your Non-Retirement Investment Portfolio Through Direct Stock Purchase Plans to Take Advantage of Cost Basis Step-Up on Death

Unless you grew up in an affluent family or with a money mentor who understood how to build net worth, the odds are good your family didn't grow their non-retirement investment assets in any meaningful way.  That is a shame because done correctly, you can enjoy streams of dividends or rents during your working years, each dollar plowed back into your holdings buying you additional household income.

 Even better, if you die still holding the stock or comparable security, your heirs will most likely be eligible for something known as a "stepped-up cost basis".  In plain English, that means the price you paid for the shares years, maybe even decades, prior becomes inconsequential and all of the deferred taxes you'd been leveraging for higher returns are effectively forgiven!  It's one of the closest things to an economically free lunch your children or other beneficiaries will ever enjoy.  Do not underestimate its attractiveness.

Imagine a successful young college graduate who saves $10,000 a year.  He puts the money aside, earning average rates of return on it.  This is done with diligence every year for 40 years until retirement at age 65 with no subsequent adjustments in the amount saved to reflect inflation.  Over the period, the cost basis on the shares (we'll assume it's a non-dividend paying stock for the sake of simplicity to focus on the larger point) would be $400,000.  The stock itself would have a value of $4,425,926.  There is a $4,026,926 deferred tax that would be owed if he or she liquidated the position.

If he dies while still holding the stock, though, his kids (or other heirs) get handed the entire $4,425,926.  The IRS then proceeds to pretend like they paid the full $4,425,926 for the stock, meaning no capital gains taxes are owed if they are subsequent disposed.

Why not just give the shares while you're still alive?  This can be a viable estate tax strategy for those over the estate tax exemption limits and who want to take advantage of the annual gift tax exclusion but it's usually better to give cash so they can purchase new shares outright.  If you gift the shares while you are still alive, your heirs can't step up the cost basis.  The recipient has to report your original cost basis, even if it is a mere fraction of the current market value.  If they don't, the IRS will assume a cost of $0 and tax the entire market value at liquidation!  Likewise, if you sell the stock while you are alive and gift them the proceeds, you owe the tax, which ultimately lowers their inheritance, anyway.  We're talking real money.  Under the right circumstances, this is an extra $1,210,000 or so you'd be able to put in your family's hands rather than the hands of politicians, who are going to spend it on wars and other nonsense.

The quickest, and cheapest, way to begin building up assets like this is to take advantage of direct stock purchase plans, or DRIPs, which many businesses offer.  These are special types of accounts that allow you to buy ownership directly from the corporation, through a transfer agent who handles the paperwork.  Many blue chip stocks in the Fortune 500 pay all, or practically all, of the expenses so you can invest as little as $50 a month at no charge.  They'll even give you fractional shares so you don't have to wait to build up your cash balance to get your hands on more stock.  You can have them direct deposits the dividends in your checking or savings account if you'd like, creating another source of cash flow for your household.

I've written on my personal blog in the past about how my family set one of these up for my youngest sister, who, in a few years upon graduating from college, should have an extra $15,000+ sitting around in Coca-Cola stock thanks to the DRIP.  If she never saves another penny, but forgets about her stock entirely, by the time she reaches the end of her life expectancy she'd be sitting on roughly $3,774,566 in Coke stock assuming average rates of return (which, in the case of Coke, is perhaps conservative since it has handily trounced the broader market by 3% to 4% for nearly a century due to the underlying business boasting such high returns on capital).  Her cost basis would be $9,000 or so, all gifted.  Her children and grandchildren would inherit it without paying any taxes.  At all.  Anywhere.  This is how amazing compounding is when left alone for long periods.  Knowing how the tax code works can give you a major net worth advantage.

It's important to understand that real people in the real world do this all the time.  This is not just some theoretical abstraction.  A lot of men and women build fortunes this way.  I just wrote about yet another secret millionaire, this time a near-minimum wage janitor, who had built up a hidden cache of $8,000,000+ in stocks bought through these sorts of low-cost or free plans.  He had acquired something like 95 different businesses - businesses that you know like Colgate-Palmolive, Coca-Cola, McCormick, Johnson & Johnson - diligently sending in his modest savings whenever he could, often buying stock without a broker.  He then took the passive income from the dividend checks and reinvested those dividends.  The coolest part?  He didn't start investing until he was in his 30's.  This was not some early bloomer who did everything right.  He just stuck to it, through everything; bull markets, bear markets, wars, oil shocks, flash crashes, terrorist attacks, tax law changes, Presidential administrations.

Why don't more people talk about these plans?  They aren't sexy.  Folks want to get rich quickly.  These can help you get rich, but it's going to take decades of patient dollar cost averaging.  I figure, you're going to get old, anyway (if you're lucky), so why not plant the equivalent of financial oak trees?  You'll get to enjoy some of the shade but the people you lost most will have a huge head start in life thanks to your wisdom and discipline.