Catch up on retirement savings

retirement

By Metro Creative Graphics

Despite the widely accepted significance of retirement planning, studies indicate that many people are behind on saving and aware that they’re behind. According to a recent survey from the online financial resource Bankrate, 55 percent of respondents indicated they are behind on their retirement saving. In addition, a Gallup poll released in May 2023 indicated that just 43 percent of nonretirees think they will have enough money to live comfortably in retirement. The good news for individuals who are behind or concerned about their financial wellness is that three strategies can help them catch up on their savings.

1. Take advantage of catch-up rules if you qualify. Laws governing retirement accounts in the United States allow individuals 50 and older to contribute more to their retirement accounts than they’re eligible to contribute prior to turning 50. Bankrate notes that current laws allow individuals over 50 to contribute an extra $1,000 per year to a traditional or Roth IRA and an extra $7,500 annually to a 401(k), 403(b) or 457(b) account.

2. Itemize your tax deductions. The online financial resource Investopedia notes that taking the standard deduction is not for everyone. Individuals with significant amounts of mortgage interest, business-related expenses that are not reimbursed by an employer, and/or charitable donations may lower their tax obligation by itemizing their deductions. That reduction in tax obligation allows individuals to redirect those funds to their retirement accounts.

3. Cut back on discretionary spending. Perhaps the simplest, though not necessarily the easiest, way to catch up on savings is to redirect funds typically spent on discretionary expenses like dining out or travel into retirement accounts. One way to feel better about this approach is to remind yourself that the less money spent on dining out and travel now means more money will be available to spend on such luxuries in retirement.

A Q&A about planning
It’s never too early to start saving for retirement. Young professionals may not be anywhere close to the end of their career, but that doesn’t mean they can afford to put off saving. Much of that has to do with inflation. The rate of inflation varies, but it’s fair to assume that your cost of living will rise dramatically between your twenty-third birthday and your seventieth birthday. If you choose to simply save as opposed to investing that money, your money will not grow at a rate necessary to overcome inflation.

Though there are no guarantees with investing, traditional retirement investment vehicles have a proven track record of outpacing inflation. For example, Standard & Poor’s 500® (S&P 500) reports that individual retirement accounts (IRAs) grew by an average of 10.8 percent between 1971 and 2020. Over that same period, the U.S. Bureau of Labor Statistics indicates that the dollar had an average rate of inflation of 3.99 percent.

How can I save more?
Various investment vehicles can help people save for retirement. Many people utilize employer-sponsored 401(k) retirement plans. These allow individuals to deposit money via pre-tax contributions deducted from their paycheck. For young people, enrolling in these plans as soon as they’re eligible can be a great way to begin building their retirement savings, and since many people contribute between 6 and 10 percent of their pre-tax earnings, their take-home pay will not be significantly different once they enroll. IRAs, pension plans, certain life insurance policies, and regular contributions to personal savings accounts are some additional always to save.

How much will I need to save?
No two people are the same, so there’s no simple answer to this question. Estimates about how much people will need in retirement range from 60 to 80 percent of their yearly income the year they stopped working full-time. A financial advisor can be a useful ally as people try to calculate how much they will need to save. However, the simplest answer to this common question is that there’s no such thing as saving too much money so long as saving does not adversely affect other areas of your life.

What if I need money before retirement?
No law prohibits people from withdrawing funds from designated retirement accounts before they retire. However, there may be significant financial penalties and tax consequences if you do so. For example, the Internal Revenue Service allows penalty-free withdrawals from a 401(k) after an account holder turns 591/2. Withdrawals made before then could be subject to federal and state income tax and a 10 percent penalty of withdrawn funds. Individuals are urged to speak with a financial advisor about withdrawal guidelines and penalties prior to opening a retirement account.

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