Guest Post: Ivie Burns
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Life expectancy continues to expand, thanks to new advances in medical care and a focus on better health habits. A longer life often means more years in retirement, which may last 30 years or more.
How much money will you need socked away to shore up a comfortable retirement? The IRS suggests you’ll need up to 80% of your annual income today to help ensure your quality of life continues once you say goodbye to a regular paycheck. And when you consider the average benefit amount paid monthly by the Social Security Administration is $1,177, it becomes clear that many of us need to boost our nest egg.
One of the simplest and most effective ways to save for retirement is to contribute to your company’s 401(k) plan. A 401(k) plan allows you to defer a portion of your paycheck to your retirement account each pay period automatically, while potentially reducing your tax bill this year.
Here are three strategies that will help optimize your plan in the year ahead:
1. Get the Match
Does your employer offer a matching contribution to your 401(k) plan? If so, find out how much you need to save to qualify for that match. The most common match formula is 50 cents for every dollar saved, up to 6% of your pay.
Saving 6% of your pay in a 401(k) plan and earning a 3% match means you are tucking away an amount equal to 9 percent of your salary each pay period for retirement. For a worker earning $75,000 per year, this means an annual 401(k) contribution of $4,500, plus another $2,250 in employer contributions. This match is a powerful incentive—essentially “free” money from your company—that will help you get closer to your retirement savings goal.
2. Increase Your Deferral Rate
Taking advantage of a company match helps you capture valuable contributions from your employer, but it may not be enough. Most 401(k) providers recommend saving 12% to 15% annually over the course of your career.
If you aren’t able to save 10 to 15% of your pay at the beginning of your career, aim to gradually increase your deferral rate over time. One smart tactic is to boost your 401(k) deferral rate every time you get a raise or bonus. This enables you to save more without reducing your take-home pay.
Another easy way to enhance your savings rate is to increase your deferral rate by 1% point every year. Some companies offer an automatic escalation feature that will periodically increase your savings rate with a simple click of a box; other companies require you to manually make this change.
3. Max Out Your Retirement Plan Contribution
In 2019, the maximum amount you can contribute to your 401(k) plan is $19,000. If you’re 50 or older, you’re eligible to make “catch-up” contributions up to an additional $6,000—for a maximum possible 401(k) contribution of $25,000.
When you max out your 401(k) plan, you not only save more for retirement, you potentially save more money since your taxable income would be lowered. That’s because all contributions to your 401(k) plan are taxed when they are withdrawn, not when they are made. (E.g., a worker in the 24% tax bracket who saves $19,000 in a 401(k) plan will reduce his tax bill by $4,560.)
Save Smart for Retirement
Whether you’re nearing retirement or just starting your career, it’s always the right time to save for the years ahead. Putting these simple strategies in place can help you accumulate more money for your retirement years, while helping to save on taxes now.
Contact Ivie for more questions about this article.
Article by Morgan Stanley and provided courtesy of Morgan Stanley Financial Advisor.