One of the long-term goals that our generation (and the previous ones… and the future ones) must have is to save for retirement, and we must learn to do it in diversified ways. There are voices who claim that the Social Security system may be at risk of collapsing in the coming years, while lawmakers discuss how to save it from the cliff.
One of the forms that has become more popular in recent years are 401(k) retirement plans, which allows you to save a part of your salary income automatically, place it in investments, and generate returns. But not everyone knows how to do it well and choose the best one. According to a recent Fidelity research, Americans are saving an average of 13.9% of their income to 401(k) funds, including employer matching contributions. Do you already have one of these plans? Are you thinking about starting one? I will tell you below what you need to know to start or improve your savings plan.
Are We Saving Enough for Our Retirement Plans?
It is true that 13.9% is a good number to save for our retirement, and it is not bad to start there, but experts recommend that the savings percentage must actually be 15% of the salary. Let’s note that 13.9% might be enough for some, but for others it might be too little. If you find yourself falling behind on your retirement goals or looking for a bigger tax break for your retirement savings, it may be wise to consider increasing your 401(k) contributions even more.
Do you know how much money you can put into your 401(k) plan? That’s simple to know. According to the most recent IRS rules, the contribution limit for the year 2024 is $23,000, a number that will probably grow in 2025, and then every year trying to keep up with inflation. This contribution limit also applies to other employer-sponsored retirement plans, such as 403(b) and 457 plans, as well as the federal Thrift Savings Plan.
If you’re 50 or older, you can take advantage of the catch-up 401(k) contributions option: This means that people in this age range can contribute up to an additional $7,500 to their plan, which adds up to a total of $30,500 by 2024
To grow your retirement savings, ask your employer if he offers a match: Check if your employer’s matching contributions are fully vested, which means that you “own” those contributions in your account, or if you need to remain employed in the organization for a minimum period of time before those contributions are consolidated. Even if you have to wait a few years to get the full employer contribution, it’s probably worth contributing enough to your 401(k) to get these benefits.
Alternatives to the 401(k) Retirement Plan
In addition to having a 401(k) plan, as we have explained above, there are other ways to save to enjoy your golden years with good money and peace of mind. You can explore the Traditional IRA or Roth plans.
A Traditional IRA retirement plan is a system by which an individual withdraws funds from their IRA account, which has been funded by pre-tax contributions. These withdrawals usually occur after the age of 59 to avoid penalties. The money withdrawn is taxable, according to the current tax rate at the time of withdrawal.
A Roth withdrawal is when an individual withdraws funds from their Roth IRA account, which has been funded by after-tax contributions. Unlike the traditional IRA (and here’s the big difference), withdrawals from a Roth are not taxable as long as certain requirements are met, such as having held the account for at least five years and being at least 59 years old at the time of withdrawal. This allows funds to grow tax-free and withdrawals in retirement to be tax-free, thus providing significant tax benefits.
Some other retirement options to consider are:
- 403(b) and 457 Plans: If you work in the public sector or for a nonprofit organization, you may have access to retirement plans such as 403(b) or 457.
- Savings or investment accounts: You can open retirement-specific savings or investment accounts, either in traditional banks or on online investment platforms.
- Investment Properties: By investing in properties such as real estate, you can generate passive income that contributes to your financial security in retirement.