Did you hear the good news? The IRS increased individual and group retirement account contribution limits this year. Every year the IRS will consider a cost-of-living adjustment and determine if they will increase retirement plan contribution limits. Taking advantage of this increase can help you better prepare for your golden years. So, if you’re wondering how you can capitalize on this news, we’d like to share some advice.
|Retirement Account Type||2019||2020|
|401(k), 403(b) and most 457 plans||$19,000||$19,500|
|SIMPLE IRA catch-up contributions||$3,000||$3,000|
|Traditional and Roth IRAs||$5,500||$6,000|
|Traditional and Roth IRA catch-up contributions||$1,000||$1,000|
Why the retirement account contribution limit increase matters
While you may be thinking that the retirement account contribution increase is minimal, it can make a substantial impact on your retirement savings if you capitalize on it. For instance, let’s say you saved $5,500 per year for 35 years. If we assume a 6% interest rate, you will retire with a nest egg of about $612,800. However, with the increase in contribution limits, you can now save $6,000 per year. If you saved $6,000 per year you would amount about $668,600 for retirement assuming 6% interest.
Keep in mind, this is an extremely high-level example. However, it’s important to see how an extra $500 a month can make a significant impact on your retirement savings.
Clever ways to take advantage of the limit increase
Regardless of your age or financial situation, remember that it’s never too late to boost your retirement savings. There are several ways in which you can make this limit increase work for you. Here are a few ideas for you to consider.
The earlier you start saving for retirement, the more compound interest will work in your favor. Compound interest is the interest that your initial investment gains, plus all the accumulated interest gets reinvested and earned interest.
For example, let’s say someone puts $200 a month into their retirement account and it earns 6% interest from age 25 to age 65. When they retire, they would have contributed $96,000 and the account would be worth $371,428.72.
However, if someone else puts the same amount at the same interest rate into the same account but they decide to start at age 35 and contribute until retirement, they would have contributed $72,000 and the account would be worth $189,739.65. This is because the first person is leveraging compound interest by starting their account early, so their interest is also gaining interest.
Increase your retirement savings by 1% every other month
You may want to automate your savings. For those who have an account through their employer, you may be able to simply log in to your 401(k) website and increase the contribution by 1% manually every few months. This money gets pulled automatically from your paycheck, so you won’t have to take other actions.
If you manage your money independently, you can still set a calendar invite to increase your contribution. However, you may have to adjust your bank accounts to ensure that you can set this money aside to be invested. The more you can automate this process, the easier it will be for you to increase your contributions. By increasing your contribution incrementally, you are less likely to miss the amount that you are taking away from your paycheck to invest.
Take advantage of your employer match
If you work for a company that contributes to a retirement account, be sure to contribute at least what they are willing to match. So, if your company matches up to 5% of your contribution amount, you will want to contribute at least 5%.
By not contributing up to your employer’s match, you are missing out on the potential increase to your retirement savings.
Automate your savings
To avoid having to take the time and effort involved in making retirement contributions, you should automate your savings. Automatic payments help to keep you accountable for your contributions.
There are a couple of ways to automate your retirement savings. If your retirement account is through your employer, you may have the option to have your contribution taken from your paycheck. If you contribute to retirement on your own, you can often set up an automatic payment through the company that has your retirement account.
Try a “no-spend” challenge
You may also want to try a ‘no spend’ challenge to help you save money. For example, you may want to take one weekend a month to not spend any money. You could also commit to not spending money on something for a specific amount of time. For example, you may want to not purchase clothes for a month or more.
Closely monitor your spending habits
The less you spend, the more money you can contribute to your retirement savings. By reducing spending, you can free up funds to contribute to your retirement. You should look at your budget to see where you can cut back. When you see where your money is going and how it will or will not benefit you in the future, it is easier to reallocate money towards retirement.
Consider saving and investing apps
There are several apps that you can use to help you round up your savings and investing contributions. Two options you may consider are acorns and stash. Both apps let you round-up your purchases to the nearest whole dollar and let you contribute the difference to your savings.
For example, if you purchased a coffee for $3.75, the app can round up the purchase to $4 and contribute $0.25 to your savings. This allows you to save for retirement without giving it a second thought.
Stash your extra cash
If you receive extra money, you can increase your contribution to retirement either incrementally or consistently. For example, if you receive a bonus or a tax refund, you can make a bulk contribution to your retirement. If you receive a raise, you may want to consider putting away 50% of the amount toward retirement.
You can also boost your retirement savings by generating an income on the side. For example, you may want to sell your second-hand clothing for a one-time boost. You could also take on a side gig such as Uber or DoorDash to consistently make side income and contribute the full amount toward a retirement savings account.
Make good use of your tax refund
Another great way to make a lump-sum contribution to your retirement is to use your tax refund. You can take this extra money and put it directly into an IRA or a 401(k) which will also help you to score tax breaks in the future.
Get serious about paying off debt
You should put money toward your retirement while paying off debt. The reason for this is the same reason that you should start contributing to retirement early – compound interest will be on your side.
Start by making at least the minimum payments on your debt and increase your debt contribution over time. When you free up your debts, be it a credit card payment, student loan, auto loan, or other debt, you can free up a lot of money to put toward your retirement.
For example, let’s say that you are contributing $300 a month to your Roth IRA and $200 to your auto loan. When you have paid off your car, you can reallocate the funds to your Roth IRA and make $500 monthly contributions to your retirement account. This way, you’ll still be paying out the same amount every month, but all your money will be going toward your future retirement.
The bottom line
There is no time like the present to begin saving for retirement. The earlier you begin, the more that your money will grow long-term. By putting extra money away, whether it be from budgeting your money better or making extra cash, you can set yourself up for a more financially secure retirement. Be sure to take advantage of this year’s increase in retirement contribution limits to save even more for retirement.
If you’re looking for a financial planning partner who can help you realize your retirement goals, we have financial planning offices in Redmond, Seattle, Mill Creek, the Tri-cities region, and Denver. Our firm focuses on helping retirees and those preparing for retirement achieve financial freedom by creating a plan that shows them how they can have the income they need and want until they turn 100.
If you’re ready to take the first step to achieving your retirement goals, our team is ready to assist you. We’ve helped hundreds of couples and individuals transition into retirement with confidence, and we’d like to do the same for you.