Boost Your Retirement Savings With These Top 3 Strategies

Share Post: facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.

Making regular contributions towards your retirement is vital to ensure that you can keep up with your cost of living while meeting your long-term goals. Between the increased costs of health care in retirement, the future trip to Hawaii, gifting to children and grandchildren, saving aggressively and skillfully is key to being prepared.

However, it seems that Americans are significantly under-prepared for retirement in terms of savings and investing.  It is estimated that 21% of Americans have nothing saved for their future, and 10% have less than $5,000 in their savings, according to Northwestern Mutual’s 2018 Planning and Progress Study. The Study also revealed that the average person has only $84,821 in retirement savings, which is still a far reach from being financially prepared in retirement.

According to an article by The Harvard Business Review, for Americans between the age of 40 and 45, the median retirement account balance is $14,500 – less than 4% of what the median income worker will require in retirement income. That same article expresses concern over Social Security’s Trust Fund becoming fully depleted by 2034 due to rapidly rising and exceeding costs. And even for those of us who believe that we have plenty saved, a job loss or unexpected medical or long-term care costs can put a real dent into our plans.  If we apply the right strategies we can avoid falling into this situation so let’s delve into some tips to help boost your retirement savings!

TIP 1: Understand Your Plan and the Contribution Limits

It is important that you know your contribution limits and understand the fine print. The maximum contribution limit for 401(k) plans are $18,500 for 2018 (with a catch-up contribution of $6,000 totaling $24,500 per year).  If your budget allows, take full advantage of the matching employer contributions while maxing out your own personal contributions. By doing so, you will watch your savings grow significantly.  Fully understanding the plan documents is equally as important as saving your money, as some plans allow up to $61,000 per year in contributions.  By grasping all the ins and outs of your plan, you can ensure you are receiving all the benefits of the plan.

Consider contributing after-tax money to your 401(k) beyond the $18,500 limit and enjoy tax-free growth on those contributions. An even bigger benefit would be to take advantage of your employer-sponsored plan contributions which are capped at $55,000 from all sources (plus a $6,000 catch up totaling $61,000).  This strategy is ideal for those plans that permit additional after-tax contributions, in-service distributions, and allow you to roll-over the after-tax amount into a Roth IRA.

If you have a target-date fund in your retirement plan, it is important to review the details with us.  Does the fund invest according to your goals, is it appropriately invested given your time horizon, and don’t forget the fees.

TIP 2: Consider a Backdoor Roth IRA Conversion

A backdoor Roth IRA option consists of opening a Nondeductible Traditional IRA and then converting it to a Roth IRA at a later date.  This helps individuals who typically are unable to contribute to a Roth, due to income limitations.  The contribution limit for a Roth IRA is $5,500 ($6,500 for individuals above age 50) for 2018.

In addition, a less well-known trick is dividing up your 401(k) to create more Roth money. The IRS permits the separation of your voluntary after-tax contributions into two categories 1) the actual contribution amount and 2) growth on those contributions. Upon retirement or change of employment, you can roll your “contribution amount” into a Roth IRA regardless of your income level.  The amount separated from the growth on the contribution can then be rolled into a Roth IRA, which yields a significant benefit (especially for high income earners).  This strategy is complex with many steps; however, it is an effective investing strategy that can be put into place with a little help from us.

TIP 3: Automation Can Help You Save!

A helpful tool in executing your investing goals is to automate your investment.  Have your contributions directly sent to your retirement account from your paycheck. Eliminating the steps in between can help with your savings goal. Start saving as soon as possible and if you cannot contribute as much as you hoped, contribute what you can and then auto-increase the amount of your contribution next year.  You can elect an auto-increase percentage that suits your budget so that over time, and with a raise in salary, you can gradually increase your contribution amounts without having to take any extra time to do so. Automated investing will not guarantee a profit or protect you from loss, but may reduce your average cost per share in a fluctuating market. The chart below from J.P. Morgan clearly depicts the potential benefit of early, consistent and long-term investing. For example, let’s compare wise investor “Consistent Chole” (who invests a total of $200,000 from the ages 25 to 65 earning an annual return of 6.0%) to investor “Late Lyla” (who invests a total of $150,000 from ages 35 to 65 also earning an annual return of 6.0%). The result is shocking as Chloe’s portfolio ends up growing to $820,238 and Lyla’s portfolio only grew to $419,008 Chloe nearly doubled her portfolio in comparison. Once again, long-term consistency wins!

 

Saving for retirement should be a priority for everyone, and with the right strategies and advice you can create and meet your retirement goals. Between increasing contributions, understanding your plan details, and automating your investing regimen you can easily be prepared for retirement. Contact us to discuss your retirement savings.

 

Disclaimer:

This piece is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.

Limitations and Early Withdrawals: Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.

Retirement Plans: Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.

Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions.

To qualify for the tax-free and penalty-free withdrawals or earnings, a Roth IRA must be in place for at least fice tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum)

Depending on state law, Roth IRA distributions may be subject to state taxes.

Share:
facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.
Share Post: facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.

RECENT POSTS

Let’s Talk About Midterm Elections and Your Investments

This week was midterm elections and we’ve had many questions about what it all could mean, which we’ll tackle in today’s blog. We consider it a great honor to vote, and while we may not know the final results of the election for days (or even months), what we do know is the election will …

Traditional IRA & Roth Conversion

If you have a Traditional IRA, you may benefit from doing a Roth conversion this year (and if you already performed a conversion this year, you still have time to do an additional conversion before year end). We typically favor Roth IRAs (over Traditional IRA balances) as Roth IRAs grow tax …

3 Nontraditional Ways to Give That Still Qualify for a Tax Deduction

Kevin Oleszewski, Senior Wealth Planner ‘Tis the season to give. In fact, 37% of charitable giving occurs during the last quarter of the year — 20% of it in December alone, according to a survey conducted by the Blackbaud Institute. And while the holidays are traditionally a time to reflect …

Considering Tax Loss Harvesting? What You Need to Know First

Kevin Oleszewski, CFP® Senior Wealth Planner As the tax year draws to a close, many high-income investors will look to reposition their portfolios to intentionally generate losses as a way to offset gains — an investment strategy known as tax loss harvesting.
1 2 3 218 219 220

Get in Touch

In just 15 minutes we can get to know your situation, then connect you with an advisor committed to helping you pursue true wealth.

Schedule a Consultation