We all hope to select the best ways to save for retirement as early on as possible in our careers. Many of us dream of a comfortable and adventurous retirement, free from worries about earning money and having enough time to do all the things we love. But how much should I have saved for retirement? Will Social Security be around? Are employer-paid pension plans a thing of the past? What about 401 (k) plans and Roth IRA’s? How can one make the most of their working years to achieve financial security for retirement?
Social security is a wildcard that’s hard to predict. Benefits are now expected to be fully paid until 2037, but at that point the trust fund reserves will be depleted, and continuing taxes are expected to cover about 76 percent of benefits. In terms of pension plans, most employers who offered pension plans have switched to 401(k) plans, where the employee is on the line to save the majority of the money. The percentage of employers still offering traditional pension plans is less than 5%, according to Towers Watson.
The infographic below from the USA.gov shows the most common ways people save for retirement today.
Since it’s hard to predict what will happen with Social Security over time, the best plan is to focus on saving through retirement plans offered by an employer, and personal savings and investments.
With this in mind, here are 5 tips for saving for retirement.
Ways to Save for Retirement:1. Start Young & Increase with Age
When you have a lot of years ahead of you to work, your retirement savings can compound over time. That means you can save a little, and with even modest returns on your investment, your money will grow. Time is your best friend when it comes to retirement savings.
As you get closer to retirement age, you can get more granular about your income needs and sources, and this can fuel your revised saving strategy. There are regulations on the books that enable you to “catch-up” on retirement savings on a pre-tax basis starting at age 50. Take advantage of catch-up contributions. They’re like paying yourself out of your gross income, instead of paying income tax on money you net from earnings. And catch up savings will go a long way toward increasing your nest egg.2. Grab Free Money
Employer matching contributions to a 401(k) are nothing short of free money! Since employers typically favor 401(k) plans to pension plans, employer contributions are fairly common. Employer matching of your 401(k) means that your employer contributes a certain amount to your retirement savings plan base on the amount of your own annual contribution. Consider saving at least enough to maximize your employer’s match.
Some employers have profit sharing plans where they make pre-tax contributions into their employees’ retirement accounts after the end of the year. They don’t necessarily involve actual company profits, but they give employers a tax-deductible option to take a delayed approach before deciding whether or how much they want to contribute to an employee’s 401(k) account. This is another good reason to save in a company-sponsored 401(k) plan so that you won’t miss out on any free money that your employer contributes.3. Accumulate Savings Even if you’re not Highly Compensated
Some think that it’s impossible to accumulate retirement savings when you don’t make a lot of money, but the Saver’s Credit (formerly called the Retirement Savings Contributions Credit) can get your savings snowball rolling. The Saver’s Credit is a tax break available to many low- and moderate-income Americans who are saving for retirement. The amount of the credit is a percentage (up to 50%) of a given year’s retirement plan contributions up to $2,000 ($4,000 if married and filing jointly), depending on income. If you are married and filing jointly with an adjusted gross income of $65,000 or less (2020), and you contribute to a qualified retirement plan, you may be eligible for a tax credit. The income limits for heads of household is $48,750, for single filers is $32,500, and for married persons filing separately is $32,000.
The Saver’s Credit is a great tool that too many people fail to utilize. In fact, an updated Transamerica study revealed that only 38 percent of U.S. households are even aware of this tax break.4. Embrace your Health Savings Account
With high deductible health plans on the rise, the health savings account (HSA) is a dynamite retirement planning option. It can be used to cover healthcare expenses, and since funds unused for medical expenses can continue to be invested and grow over time, you can also save additional funds for retirement. Contributions are pre-tax, and are potentially not taxed as you withdraw them. The individual or employer contributes up to $7,100 for a family or $3,550 for an individual ($7,000 and $3,500, respectively for 2019). Those over age 55 can sock away an additional $1,000 per year. Consider funding these to the maximum since health care costs are likely to be a substantial part of a retirement budget, thus a great way to make funds available for the future, tax-free.
And one more thing about HSA’s you’ll want to know, once you reach age 65, assets in the HSA account may potentially be used for anything, not just healthcare-related expenses.
5. Seek Professional Advice
You may want to consider a financial planner to help you with retirement strategies. Keep in mind that financial planners make a commission on the investments they make for you. Be sure the advisor is someone you trust, or an investment fiduciary (fee-only advisors whose advice is independent of the products recommended.) Start by creating a retirement budget that factors in what you will need to live your desired lifestyle and to be able to afford healthcare and other rising expenses as you age. Then hold your advisor accountable as you save for estimating your retirement income potential based on your savings, and modest returns on your investments. Meet every six months or year to revisit your budget and retirement income estimates to make sure you remain on track. And even if you work with a trusted advisor, don’t stop educating yourself about retirement savings options, strategies and tax breaks. The best relationships between investors and financial advisors are an enlightened ones, where both parties collaborate to set goals, budgets and to explore the best available options for saving for retirement.
The Bottom Line on Your Golden Years
Give yourself financial peace of mind by starting to save when you’re young, and adapt your savings strategies as you age. Take advantage of the full range of retirement benefits offered by your employer and the government, and strategies to save more while paying less in taxes. Seek help from financial professionals to invest, but stay sharp on your own goals and strategies to secure your financial future.