Maximizing Retirement Savings
How much money is necessary for you to retire within your desired timeline? The most common response to such a question is 'I don't know.' Many Americans reach retirement without sufficient funds to maintain their desired lifestyle. The reasons vary: some may be too busy worrying about the next month to think about something that is years or decades away while others just don't know where or how to begin. If you have not established a plan for retiring comfortably, now is a great time to start. Take advantage of these simple tips to get on the right path:
Max out company sponsored plans
Most large corporations will match employee contributions to a 401(k) or other retirement vehicle. That's almost like free money since you're getting paid to save money. Where else can you get an immediate return on your investment? Usually, participating employers will offer to match 50 to 100 percent of your contribution but there are usually some limits to how much an employer will match. Many plans will only match up to 6 percent of an employee's annual income. So whenever possible, take full advantage of this gift since it's part of the benefits package the company touted when they hired you.
Those who start saving for retirement early will have extra time to save and will benefit from long-term compounding interest. Those who didn't start early can benefit from what's commonly referred to as 'catch-up' contributions. After reaching the age of 50, individuals may contribute above the normal limit for 401(k) contributions. In 2012, contribution limits are $17,000 and catch-up limits allow for an additional $5,500. That kind of repeated contribution adds up over 10 or 15 years.
While catch-up contributions are a great tool, they may not compare to the compounding interest you can earn over time. The whole point of a tax benefit is to accumulate interest on money you would have otherwise paid to the IRS. The longer you can compound that interest, the better off you'll be.
The traditional IRA and Roth IRA
You may also want to take advantage of traditional IRA or Roth IRA contributions. Contributions to traditional IRAs may be tax deductible depending on the taxpayer's income, tax filing status, and coverage by an employer-sponsored plan. Roth IRA contributions are not tax deductible but withdrawals may be tax-free. Be sure to consult with a professional as there are many rules and criteria you need to be aware of and each strategy has its pros and cons when retirement arrives.
Determine how much you need for retirement and what you are capable of setting aside each month. If you can, max out any retirement vehicle with tax-benefits. Also, if you can afford to max out each retirement vehicle, don't feel like you can't save more. Your future has no contribution limits.
What to do next
- Determine when you wish to retire and whether you will still work during retirement.
- Determine what kind of lifestyle you wish to have during retirement.
- Use our Retirement Planner Calculator to get an idea of how much you need to be saving each month.
- Meet with a professional to determine which investments will help you reach your goals.