So you’ve heard you should save for retirement. You agree that’s a good idea. Maybe you even start doing some things… but then get bogged down by the choices and options available out there. It’s kind of overwhelming. How do you decide? There’s a lot riding on this and you don’t want to make a mistake, right?
Relax. I’ve got you. The “secret” to successful retirement savings actually isn’t a secret at all. It’s knowing how to prioritize. No matter your age, if you are currently working, you can make the most of what you’ve got by following 3 simple steps. Let’s get started.
- STEP ONE: Get ALL the free money! This means maxing your employer match. If you have a company plan at work, FIND OUT what the maximum employer match is and do it. This could look like: “Our 401k plan will match 100% of your contributions up to 3%.” In English, that means, to get ALL the free money your employer is offering you, tell HR you want to contribute 3% per paycheck. This is the first really smart move to successful retirement savings. So start here, even if it is hard at first when you are starting out. Make it a priority and you will be glad you did later. After you can easily get all of your employer match, move on to Step Two. (And if you want to dive into the nitty gritty on employer matching plans, you can check out an Investopedia article on the topic here.)
- STEP TWO: Next, go TAX FREE! I’m talking about ROTH options here. Many employers now offer Roth options (i.e., a Roth 401k or a Roth 403b) as part of the company plan. If your employer does, GREAT! You are one lucky person. Saving into a Roth style account means you can put away money for your future that will (generally) NOT be taxed when you take it out later in retirement (of course there are a few exceptions). While a tax-free account may sound ho-hum right now, believe me, it is a BIG deal when you are retired. (Just ask any retired person!) I’ve never heard anyone say, “I wish I hadn’t saved so much in my Roth.” I do hear people say, “Why didn’t I do this sooner??” So take note and avoid living in regret – make Roth savings your #2 retirement savings goal. If you don’t have any Roth options available through your employer, you can open one yourself! Roth IRA’s are available at banks, online brokerages, and through your friendly Shadowridge advisors – all you have to do is ask. We can help you work around the details (there are qualifications and maximums to be aware of) – and get started.
- STEP THREE: Finally, go for the MAX! You may be thinking that you are “maxing out” your 401k or 403b with Step #1 above. Nope. The employer match is just the first step to retirement savings success. The actual “max” for a 401k/403b is much higher than the “match.” For 2022, the maximum an employee can contribute is $20,500 if you’re under age 50 and $27,000 if you’re over age 50 (including the year in which you turn 50 years old). If you’re under age 50 and make a salary of $60,000, that is about 34% of your paycheck, not the 3% required for the employer match. Most people don’t realize they can put away this much money into their retirement savings accounts. But if you do, it also usually means you save a fairly sizable amount on your tax bill, as well (if you are doing this in a traditional, tax-deferred retirement account). Self-employed folks, good news! The limit is potentially even HIGHER for you. SEP contributions are limited to the lesser of 25% of employee compensation or $61,000 for the tax year. Nice.
If you’re reading this and thinking, “there is no way I will ever be able to save 34% of my salary!” – it’s ok. Remember, Rome wasn’t built in a day. The secret to retirement savings is to prioritize, remember? Start with Step One and challenge yourself to see how far you can go. As Les Brown said, “Shoot for the moon – even if you miss it, you will land among the stars.” That is my wish for you.
Until next time,