Whether you’ve just started in the workforce or have been working for decades, we all know the importance of saving for retirement. Despite this knowledge, a majority of Americans have not created or contributed to their nest egg. According to the National Retirement Risk Index (NRRI), nearly 50% aren’t saving enough to maintain their standard of living during their later years and 21% aren’t saving any money at all.
Saving for retirement is easier than you think, but it will take discipline and a change in your financial habits and mindset. The financial experts at McHenry Savings Bank have compiled some simple yet meaningful ways you can save for your retirement:
When you get a raise or bonus, increase your 401(k) contribution. This is the easiest and most effective way to boost your savings potential. For example, if you receive a 3% raise, increase your plan contribution to 1.5%. Adopting this habit will help you save more and result in a larger paycheck, as contributions are taken out pre-tax.
If you’re fortunate enough to receive a bonus, many employers will allow you to contribute at a higher rate for that pay period as long as you don’t exceed the annual contribution limit. In 2020, the IRS raised the contribution limits to $19,500 and the catch-up contribution limit (for those 50 and older) to $6,500. The catch-up limit is in addition to the annual contribution limit.
Capture all of your employer’s match. There is no better investment than taking advantage of the matching 401(k) contribution dollars your employer is willing to give you….for free. According to a study by Alight Solutions, nearly 20% percent of United States workers are not saving enough to receive the full match offered by their employer. The same study indicates that these same workers are within 2% of receiving the full match. Simply put, they can receive the full match if they increase their contribution by 1% over the next two years. If you’re unsure about how much you are contributing or the current match percentage, check with your human resources department.
Make IRA contributions. An Individual Retirement Account (IRA) is another retirement saving strategy - especially for those who have maxed out the contribution to their employer’s 401(k) or whose employer does not offer a 401(k). Both a Traditional IRA and a Roth IRA offer tax breaks for saving as well as tax-deferred growth on contributions. However, the benefits vary between the two types:
- Traditional IRA. To qualify for a Traditional IRA, you must have earned income. There is no income maximum, but tax-deductions my phase out at $65,000 gross income for individuals and $104,000 for married couples filing jointly. For 2020, the maximum contribution limit is $6,000; $7,000 for those 50 and older. Contributions may be deducted from your income taxes provided you don’t make more than these amounts. However, the monies grow on a tax-deferred basis until they are withdrawn. When you reach age 59-½ funds can be withdrawn without penalty. If you withdraw money prior to age 59-½, the amount taken out will be taxed as income and be subject to a 10% penalty. After age 72, minimum distributions are required.
- Roth IRA. Like its counterpart, you must have earned income. The maximum income is $124,000 for individuals and $196,000 for married filing jointly, but the contribution limits are the same as the Traditional IRA. The difference is that with the Roth IRA you can invest money post-tax and the money grows tax-free. Contributions to the account can be withdrawn tax-free, but earnings may be taxed as income and be subject to a 10% penalty. After age 59-½ both contributions and earnings can be taken out tax-free.
From a Roth or Traditional IRA to Certificates of Deposit and interest-bearing savings accounts, McHenry Savings Bank has a variety of products to meet your savings and retirement needs. With branches in McHenry, Richmond, and Johnsburg, we are a full-service financial institution with personal, commercial, and investment services. For more information or to schedule an appointment, email us at firstname.lastname@example.org or call us at 815-385-3000.
Photo from Canva