Retirement

Saving for Retirement

When asked how much money do you need to save for retirement, most people will be at a loss for words. Benjamin Franklin said, “An investment in knowledge pays the best interest.”

A recent survey by Bankrate found that 61% of Americans are not aware of how much they need to save to fund their retirement.

Another research by Northwestern Mutual highlights:

  • One in five Americans (21%) do NOT have retirement savings at all
  • One in three Baby Boomers (33%), the generation closest to retirement age, only have between $0 – $25,000 in retirement savings
  • Three quarters of Americans believe it is “not all likely” (24%) or only “somewhat likely” (51%) that Social Security will be available when they retire
  • Nearly half (46%) of adults have taken no steps to prepare for the likelihood that they could outlive their savings

As day-to-day costs continue to soar, it becomes harder to set aside money for the future. Yet, the longer you put off planning for your retirement, the farther behind you will keep falling.

It is never too late to get started. The earlier you start putting away money for your retirement, the lesser you will have to save each month to reach your goals. Jim Cramer said, “Thanks to the magic of compounding, the earlier in your life you start investing in the market, the bigger your long-term gains can be,” If you start saving early, you can invest the money you have saved in a 401(k) plan or IRA, so you don’t have to pay capital gains or dividend taxes on your gains.

Fidelity has a rule of thumb for saving for retirement as you age: At the age of 30, you should have saved up at least your annual salary. At the age of 40, you should have three times your salary. When you turn 50, you should have six times what you earn annually saved for your retirement. By the time you turn 60, your goal should be to have eight times your annual salary saved and this should reach ten times by the time you are 67.

Here are a few steps to get you started to save for your retirement:

1. Do not delay, start as soon as possible

If you don’t have a budget, this would be a good time to create one and making it a habit to stick by it. You can use our Budgeting Tool to get started. Once you have your budget planned out, start putting aside some amount for your retirement. On the other hand, you are probably already sticking to a stringent budget. This should not stop you from making contributions towards your retirement savings. You can start small by cutting corners. Look at your budget and find areas where you can cut down some expenses. Start putting away these extra dollars into your savings. If you are unable to cut any corners in your budget, consider another source of income, like a part time job or freelance work. The money you earn through this can be stashed away into your retirement savings.

2. Automate your savings

Automatic contributions to your retirement account like a 401(k) or IRA, will make it easier to save on a monthly basis. You will eventually not see the money you are setting aside and learn to live without it. You can also use options to auto-increase your contributions to your retirement accounts. These options enable you to choose the percentage you would like to raise you contributions by and how often.

3. Invest in stocks

If you start investing at an early age, you have a long-term investment period and you will have a better understanding about handling market fluctuations.

4. Contribute to your 401(k) and IRA

If you are employed, you can start by saving at least 10 percent of your earnings, including any employer match, in a tax-preferred retirement account, such as a 401 (k). Most full time jobs offer retirement benefits and new workers are usually auto-enrolled into these plans. Look at your contributions and see if you are set up to save a smaller portion of your salary. If this is the case, then work on a plan to increase your contribution or at least set up an auto-escalation so that you put in more each year.

On the other hand, if you are a part time worker or your employer does not offer a 401(k), consider investing in a Roth IRA. According to Bankrate, “You can save $5,500 in after-tax income, but the money grows tax-free and won’t be taxed when you withdraw the funds in retirement. Alternatively, you can contribute pre-tax income to a traditional IRA. You can contribute up to the same amount as a Roth IRA each year, but the funds aren’t taxed until you withdraw. In order to replicate the simplicity of a 401(k), you can set up your direct deposit to automatically contribute to whichever retirement fund you choose. By directing just $458 of your monthly income to your IRA, you can max out your contributions for the year.”

5. Understand catch up contributions and take advantage of the same, if you are 50 or older

According to Merriledge, one of the reasons it’s important to start saving early if you can is that yearly contributions to IRAs and 401(k) plans are limited. The good news as of this calendar year is that if you reach age 50, you’re eligible to go beyond the normal limits with catch-up contributions to IRAs and 401(k)s. So if over the years, you haven’t been able to save as much as you would have liked, catch-up contributions can help boost your retirement savings.

For 2020, your total contributions to all of your traditional and Roth IRAs cannot be more than:

  • $6,000 ($7,000 if you’re age 50 or older), or
  • your taxable compensation for the year, if your compensation was less than this dollar limit.

For 2019, the limits are the same as 2020.

The chart below indicates the amount of Roth IRA contributions that you can make for 2020:

If your filing status is… And your modified AGI is… Then you can contribute…
married filing jointly or qualifying widow(er)

< $196,000

up to the limit (mentioned above)

> $196,000 but < $206,000

a reduced amount

> $206,000

zero

married filing separately and you lived with your spouse at any time during the year

< $10,000

a reduced amount

> $10,000

zero

singlehead of household, or married filing separately and you did not live with your spouse at any time during the year

< $124,000

up to the limit

> $124,000 but < $139,000

a reduced amount

> $139,000

zero

source: irs.gov

6. Save surplus money

Whenever you end up with extra cash from a bonus or another income source, save at least half of it. Saving a little in this manner will add to your savings and help you reach your goal faster.

7. Delay your Social Security as you get closer to retirement

According to Debra Greenberg, director, IRA product management, Bank of America Merrill Lynch, “For every year you can delay receiving a Social Security payment before you reach age 70, you can increase the amount you receive in the future.

The earliest you can start receiving your Social Security benefits is at the age of 62. But if you wait each year until you reach the age of 70, your monthly benefit will increase and the additional income will add up quickly. If you push your retirement back by a year, it could potentially increase future survivor benefits for you.

Cost of Living Adjustments

The tax law places limits on the dollar amount of contributions to retirement plans and IRAs and the amount of benefits under a pension plan. IRC Section 415 requires the limits to be adjusted annually for cost-of-living increases.

2018 2019 2020

IRAs

IRA Contribution Limit $5,500 $6,000 $6,000
IRA Catch-Up Contributions 1,000 1,000 1,000

IRA AGI Deduction Phase-out Starting at

Joint Return 101,000 103,000 104,000
Single or Head of Household 63,000 64,000 65,000

SEP

SEP Minimum Compensation 600 600 600
SEP Maximum Contribution 55,000 56,000 57,000
SEP Maximum Compensation 275,000 280,000 285,000

SIMPLE Plans

SIMPLE Maximum Contributions 12,500 13,000 13,500
Catch-up Contributions 3,000 3,000 3,000

401(k), 403(b), Profit-Sharing Plans, etc.

Annual Compensation 275,000 280,000 285,000
Elective Deferrals 18,500 19,000 19,500
Catch-up Contributions 6,000 6,000 6,500
Defined Contribution Limits 55,000 56,000 57,000
ESOP Limits 1,105,000

220,000

1,130,000

225,000

1,115,000

230,000

Other

HCE Threshold 120,000 125,000 130,000
Defined Benefit Limits 220,000 225,000 230,000
Key Employee 175,000 180,000 185,000
457 Elective Deferrals 18,500 19,000 19,500
Control Employee (board member or officer) 110,000 110,000 115,000
Control Employee (compensation-based) 220,000 225,000 230,000
Taxable Wage Base 128,400 132,900 137,700
source: irs.gov

If you haven’t started already, it is still not too late. Recognizing and understanding the need to put away money for your retirement is the first step. Once you do that, you can start finding creative ways to start increasing your contributions so you don’t end up regretting when it’s too late.

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