You know you should be saving for retirement, but the bills are piling up, the kids need new shoes, your car is needing an upgrade soon, your property taxes have increased, and…
You just can’t seem to find room in the budget without taking from some other necessary expense. And even if you had money to save, you’ve put it off for so long that it feels daunting to start.
Sound like a familiar story? Join the club. MarketWatch reported that, as of this year, 28 percent of Americans have no retirement savings at all (and 30 percent don’t think retirement is even in the cards for them).
Even if you don’t have a single penny saved for retirement, I want to encourage you – it’s not too late. There are steps you can take, starting now, that will set you on the path toward a more stable financial future.
But the imperative is to act nowand act smart.
First, you need to lay some groundwork:
- Calculate how much you need to save. Consider the lifestyle you want to have and how much time you have before retirement. A solid starting point is the 4 percent rule— your current income divided by 4 percent is the amount you’ll need to save for retirement (for example: 50k / 4 percent = 1.25 million).
- Make a plan. Divide the total amount you need to save by the number of months you have until retirement. (A retirement calculator comes in handy here. Try this one from NerdWallet.)
- Work on getting out of debt. Make this your first priority – no one wants debt raining on their retirement parade.
- Maximize your income. That could mean changing jobs (or possibly careers, if it’s advantageous), picking up a side gig, selling things you no longer want, or even scouring lost asset databases for unclaimed money.
Another step in this process is taking advantage of investment-based savings. Here are some options for that:
1. Maximize employer 401(k) contributions. If your employer offers a 401(k) option and matches it (which a lot do with it being a tax-incentivized move), it’s worth investing some of your paycheck in yours. It’s a powerful savings move. Not taking advantage of employer contributions is like leaving free money on the table.
The 2024 contribution limit for 401(k)s is 23k (or 30.5k if you're 50 or older). And not only do you benefit from your employer’s contributions, but your own contributions are made pre-tax, reducing your taxable income [this is for a traditional 401(k), not a Roth 401(k)]. It’s a win-win.
2. Open an IRA. This provides you with an additional tax-advantaged option beyond your employer-sponsored 401(k). IRAs offer flexible investment options and use the unmatched power of compound interest to multiply your savings.
And let’s not forget the long-term benefits: these contributions grow tax-deferred, which means you’re building a stronger financial future, faster.
3. Take advantage of catch-up contributions. This is a way to make up for lost time. If you're 50 or older and want to increase your retirement savings while also reducing your taxable income, the IRS catch-up contributions rule allows you to contribute more to your IRA or 401(k) than younger individuals. For IRAs, you can contribute an additional 1k annually, and for 401(k)s, you can add an extra 7.5k.
By maxing out both regular and catch-up contributions, you can close the retirement savings gap much faster than you might think.
Bonus tip: Use the Saver’s Credit. This is where retirement savings and tax credits go hand-in-hand. For lower- to moderate-income earners, the Saver’s Credit offers an additional incentive to contribute to retirement savings.
If your adjusted gross income (AGI) is below 36.5k for individuals or 73k for married couples filing jointly in 2024, you may qualify for a tax credit of up to 50 percent of the first 2k you contribute to a retirement account like an IRA or 401(k).
I know that was a mouthful, but here’s the bottom line: the Saver’s Credit is a tax credit that directly reduces the amount of tax you owe—dollar for dollar.
If you have very little to no retirement savings, you must take action as soon as possible – every little bit counts here. Do what you can with the time you still have. For the best results related to the tax savings available, consult your friendly neighborhood tax advisor (my door is always open).
We know how stressful not having retirement savings can be, and we want you to have the peace of mind that comes with knowing your financial future is secure. Let’s talk about how you can start catching up on your savings (and reduce your taxes while you’re at it).
Schedule a time for us to visit.
Helping you make up for lost time,
Mike Mead, EA