Three Reasons to Increase Your Retirement Plan Contributions This Year
Your company’s retirement plan is just one of a collection of useful tools for successful retirement planning. As is the case with any tool, you have to use it for it to work. Creating a future of financial security in retirement can help decrease anxiety and stress around leaving the workforce, which can benefit not only your health, but your overall experience as a retiree. Instead of buying the latest gadget or planning a vacation, consider thinking about the future by looking at what you can do to increase your financial stability in retirement.
A financially secure retirement may look slightly different from person to person, depending on your lifestyle and spending habits—but some common goals include:
- Being debt-free
- Setting a realistic and comfortable monthly budget
- Having savings to cover any bills and expenses
- Spending time enjoying life instead of working
Regardless of your individual goals, education and saving more, earlier, is key to getting on the right track.
Why consider saving more in your retirement plan?
Of course, there are a million excuses you can use to put off saving for retirement, but there are multiple reasons to increase your contributions to your employer-sponsored 401(k), IRA, 403(b), etc. if you have the chance.
Saving more reduces your taxable incomePaying taxes is unavoidable, but you can postpone paying tax on income that you send directly to your tax-deferred, employer-sponsored retirement plan. Pre-tax dollars that you contribute to your plan are taken directly from your gross salary and invested so they can grow throughout your career. With pre-tax contributions, you’ll pay taxes on the money only when you make withdrawals from your account in retirement—but any accumulated interest on the investments isn’t be taxed until distribution as well.
So, not only can you benefit from paying lower income taxes during the years you’re saving, but the pre-tax money you invest in your retirement plan can grow over time and result in a larger savings account to use for living comfortably in retirement. Making your contribution with Roth after-tax contributions? You still save on taxes—just when you make a withdrawal instead—because earnings are not taxable for qualified Roth distributions.
Employer matching contributions can help snowball your savingsEmployers often choose to match your contributions to your retirement plan as a part of your benefits package. It can come in the form of a match up to a certain percentage of your salary or a flat contribution of a certain percentage of your salary. If your employer is offering to match up to a specific percentage of your pay in a retirement account, you should try to increase your annual contribution rate to at least that percentage. Otherwise, you may be leaving free money on the table that could have benefited your plan for financial security in retirement.
Experts suggest that you save 10-15 percent of your annual income, but any money going into your retirement savings is better than none. Take a look at your employer’s benefits package to find out if and how much they’ll contribute to your retirement account on your behalf. Then, consider making the necessary changes to increase your contribution to make sure you are taking advantage of any retirement planning benefits offered by your employer.
You might also be interested in: Five things you need to know if you are saving in a 401(k)
Social Security income likely won't cover all your expenses in retirementMany who decide to postpone saving for retirement are looking forward to using Social Security income as a replacement for their income. However, your Social Security benefit only replaces an average of approximately 40 percent of your annual income. Depending on your healthcare needs and general lifestyle expenses, this could leave you in a tough position, so it may be in your best interest to increase your savings in an employer-sponsored 401(k).
While it’s advisable to try and decrease your expenses in retirement, increasing your retirement plan contributions throughout your career can be a beneficial way to boost your savings and set yourself up for financial security after you exit the workforce.
Planning for a financially secure and comfortable retirement
You may be following all of the "best practices" for retirement planning, but it’s important to remember that both your retirement plan and your needs are unique. Your circumstances and requirements may differ from the average person’s, and because of that, it’s important to review your contributions and retirement goals on a regular basis.
Increasing your contributions every year is one of many simple ways to boost your retirement savings. Making any other necessary changes as your needs and life goals change can help set you up for the ideal retirement you’ve been working so hard to achieve.
Check out our Retirement Saving Resources for additional information on preparing for a financially-secure future.