WCCU Mom's Blog
Retirement Savings – How Much is Enough?
Another 2016 year-end survey by Harris Poll, found that although 70% of American are saving for retirement, but just 21% plan to max out an individual retirement account or 401k.
Regardless if you are 25 or 55, here are a couple tips to help you boost your savings to provide the retirement of your dreams!
How Much Will Your Need:
The first step is to estimate how much you’ll need. Keep in mind this will vary for everyone., some people like to just sit back and relax, while others want to travel and see the world. Another factor is how old you would like to be when you retire. Constitute what your ideal retirement might be and put together a financial plan of action now in order to reach your retirement goal later.
To help you put together your financial retirement plan use the free online retirement calculator from NerdWallet. Here you can set a goal, track progress and understand if you need to save more to retire on time.
Take the 401(k) or 403(b) Company Match:
If your employer offers a traditional 401(k) plan and a company match, you should make sure to contribute at least enough to qualify for the maximum matching amount. This is essentially free money so make sure you don’t leave it on the table.
Also keep in mind that all 401(k) contributions are pre-tax money and that increases the value of your contributions. So try to contribute up to the maximum amount allowed by law to your retirement savings. In 2016, the maximum contribution you could make to your 401(k) for people under 50 years old was $18,000. If you are older then 50 then you could make an additional “catch-up” contribution of $6000 per year for a total of up to $24,000.
Set Up a Roth IRA
The Roth IRA is an individual retirement account. Unlike a Traditional IRA, you do not get a tax break on contributions to a Roth IRA, but if all conditions are met then any withdrawals from a Roth IRA are tax-free and any transactions inside of the IRA (capital gams, interest, or dividends) do not incur the current tax liability. With a traditional IRA you have to pay income tax on every withdrawal you make.
There are some qualifying factors when it comes to a Roth IRA, to learn more about these check out RothIRA.com.
If your income is to high to be able to contribute directly to a Roth IRA, you still could take advantage of a back door Roth IRA. This is a completely legal and smart way to still get the benefits of a saving via a Roth IRA. When it comes to a backdoor Roth IRA, you first make a contribution to a Traditional IRA, then within a couple days convert the Traditional IRA to a Roth IRA. This can get complicated so make sure you talk to your financial advisor about this option.
Automate your Retirement Savings:
One of the easiest ways you can save money each month is to put your savings plan on autopilot. When it comes to your 401(k) your employer automatically takes the pretax money out of your paycheck and puts it towards your retirement account, so you never have to see it, you just know it happens every month.
When you have an individual retirement account such as an IRA it is also important to set up automatic transfers from your checking account into your IRA every month. As it is harder to rely on yourself to manually do the transfer each month because you have that temptation to spend those funds first.
Make Small Increases in Your Contributions Each Year
While most experts recommend saving 15% of your income for retirement each paycheck, you might not be able to contribute that much to start out. Instead, you can start with a lower contribution percentage and then increase it by 1% each year. So if you get a 2% annual raise consider putting half of the extra funds towards your retirement contribution. Before you know it you will be at the recommended retirement savings of 15% and be able to greatly increase your retirement portfolio.
There are some companies that will automatically bump up your contribution rate at the beginning of each year so be sure to check with your employer if you are worried about accidentally doubling your increase.
If you have any further questions regarding retirement savings and/or IRAs be sure to ask one of Winnebago Community Credit Union’s investment specialists.