In November, 2018, the Internal Revenue Service announced a series of important updates that affect the retirement savings accounts of Americans across the country. While the initial announcement may have not stood out in your newsfeed—they were announced around the holidays after all—the changes could have a substantial impact on your retirement savings for years to come.
The IRS updates concern cost-of-living adjustments to employee contribution limits to 401(k) and similar workplace retirement plans, which were raised to $19,000 this year, up from $18,500 in 2018.1 The limit on IRA contributions—last raised in 2013—also increased by $500, from $5,500 to $6,000.2
Additional catch-up contributions available to those aged 50 and over remain unchanged at $6,000 for 401(k)s and $1,000 for IRAs.3 But with the increases to regular contribution limits, people in this age group can now contribute as much as $25,000 to their 401(k)s annually and $7,000 to their IRAs.4
Granted, when compared to the hype around March Madness, these adjustments may not seem all that exciting. Even if you are not currently maxing out your 401(k) or IRA contributions, these updates become far more interesting when you consider some numbers associated with them and retirement in general.
First, consider what happens when $500 is invested annually at an average annual compounded rate of return of five to eight percent, which a 401(k) or IRA could possibly provide.5 It would grow to more than $12,300 over 15 years at five percent, and roughly $16,200 at eight percent.6 That’s impressive, especially for an investment that amounts to less than $10 per week—about the average cost to dine out for one lunch.*
The fact money has the potential to grow when it’s invested is a rudimentary concept. But performing simple calculations like these can be extremely valuable—especially for those who have excelled in the past at making excuses for not contributing more to their 401(k) accounts. These calculations reinforce the fact that every dollar really does count when it comes to saving for retirement.
There are more numbers to consider—and these are scary. A survey conducted a few months ago by the Certified Financial Planner Board of Standards with research-led consulting firm Heart & Mind Strategies found that two-thirds of households have less than $100,000 saved for retirement.7 There have been numerous other studies, too, all with the same conclusion: Americans are simply not saving enough to live well after they leave the workforce.
At the same time, we’re living longer than ever before and, in many cases, will need to support ourselves in retirement for 10, 20 or even 30 years.
"The fact money has the potential to grow when it’s invested is a rudimentary concept. But performing simple calculations can be extremely valuable... These calculations reinforce the fact that every dollar really does count when it comes to saving for retirement."
The fact is, most of us realize the benefits and importance of saving more for retirement, yet we all face different circumstances that can make doing so challenging. Some people are living on one income. Others are putting kids through college, rebounding from a job loss or similar setback, or facing any number of competing financial priorities.
So how can you balance these obligations to potentially save more for retirement? Here are some helpful suggestions:
1. Put your retirement first.
Contribute up to the company match so you’re not leaving “free money” on the table. And, if possible, don’t use your retirement savings to support your kids or parents.
2. Consider small steps.
Small weekly amounts like $12, $14, and $16 can make a noticeable difference in savings. Don’t skip buying something you really need, but there are probably places in your spending that are easy to cut. Even bringing your lunch or using coupons can add up.
3. Not saving that much—don’t fret.
Few people get there overnight. Think of planning for retirement as a journey. The key is to save as much as you can now and try to increase savings over time.
4. Aim to save 15 percent.
Many financial advisors suggest contributing 15 percent of your income toward retirement annually—which includes any matching contributions or profit sharing an employer may contribute. In most cases, those who do this have a better chance of maintaining the quality of life they enjoy now after they retire.
5. Find an advisor.
Do yourself a favor and call a financial advisor if you’re not already working with one. Many employers offer access to advisors through their retirement plans. Asking friends and family for suggestions could also be a great place to start. Talking to an advisor can help you to better understand where you’re tracking on your path to retirement. To learn more about how to select an advisor that could fit your needs, check out a prior story, “How to Find the Right Financial Advisor for You.”
*This is a hypothetical example that is not representative of the performance of an actual product or account. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing which, if applied, would reduce performance.
Investing involves risk, including possible loss of principal.
The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.