If you have a retirement account (or accounts), now’s the time to evaluate those accounts. If you don’t, now’s the time to open one. In this article, we up the ante on 2021 by helping you assess your personal financial situation on the road to retirement.
Why You Need Retirement Savings
The most powerful thing you can do for your retirement investing is put time and the power of compounding interest on your side. In the simplest terms, the earlier you start investing for retirement, the faster you’ll see progress and reach your goals.
For example, if you start saving $500 per month at age 25 and earn 7% interest annually, you’ll amass roughly $1.2 million by age 65. Start saving the same way but at 35, and although you’ll contribute only $60,000 less (10 years x 12 months x $500), you’ll end up with less than half—around $567,000. That’s the power of compounding interest.
According to the Federal Reserve Bank, only 35% of Americans ages 30 to 44 consider their retirement savings on track to meet their needs. If you’re not already, do your best to be among them. Someday you’ll want or need to stop working. When the time comes, there’s nothing worse than discovering you can’t afford to.
Action To Take: Evaluate Your Retirement Accounts
Optimize Your Company’s 401(k) Match
If you have a 401(k), does your company offer to match contributions? Are you optimizing your company’s match? A 401(k) match is literally free money from your employer toward your future. For example, if your employer matches up to 3% of your salary and you make $60,000, that’s an extra $1,800 that you didn’t have to work for. If you’re not taking full advantage of your employer’s match, meet with the plan administrator and make adjustments.
Contribute the Maximum Allowed
Contributions to your 401(k) are made with pretax dollars. In other words, your taxable income is reduced by however much you contribute up to the annual maximum, which is $19,500 for the 2020 tax year. If you’re 50 or older, you can contribute an additional $6,500 for 2020.
Open an IRA
If you don’t have a 401(k), consider opening and contributing to an individual retirement account (IRA), which also offers tax advantages. You might even be eligible to contribute to both, further supercharging your retirement savings. IRAs, both Roth and traditional, have a maximum contribution limit of $6,000 if you’re under 50. Individuals over 50 years can contribute an extra $1,000 in 2021 to traditional and Roth IRAs.
A traditional IRA allows for pretax contributions, similar to a 401(k), while with a Roth IRA, you invest after-tax cash. But you can withdraw from your Roth IRA tax- and penalty-free as long as you wait until you’re 59 1/2 and the account has been open for at least five years.
Next Steps and More Resources
Follow this simple plan to make a straightforward assessment of your retirement situation:
- Ensure you’re making sufficient progress toward retirement for your age. For example, a general rule of thumb says that by age 40, you should have three times your salary saved. Do you have that or are you on track to? If not, consider what discretionary expenses you can trim to increase your retirement contributions.
- If you don’t have a retirement account, consider your options. Does your employer offer a 401(k)? If so, look at signing up and maxing out your contributions or at least contributing up to your employer’s match. If your employer doesn’t offer a 401(k) or other retirement plan, open an IRA.
- If you’re in a 401(k) and want to bolster your retirement savings or don’t have access to one, think about adding to or opening a traditional or Roth IRA.
In the next article in this series, we explore a good problem to have — dealing with old 401(k) plans and IRAs that are gathering dust on your proverbial investment bookshelf.