5 year-end strategies to boost your retirement savings
Rounding out another year comes with plenty of to-dos: getting gifts for loved ones, spending time with family, embracing the holiday spirit, and—of course—coming up with resolutions for the year ahead. Many people overlook one critical resolution, however: making sure they’re maximizing their retirement account contributions. If you haven’t already maxed out your 2020 contributions to your retirement plan or individual accounts, doing so at the end of the year is a great way to cross one more thing off your list before the ball drops on December 31.
Although everyone’s retirement goals are unique, there are year-end actions that can help ensure you’re keeping your strategy on track. Here’s what you should do to make sure you’re taking advantage of retirement savings opportunities.
1. Max our your allowable yearly contributions
The first and best step toward maximizing your retirement savings is to maximize your allowable yearly contributions. But many people either forget to contribute the full amount, or neglect to make any contributions whatsoever. The end of the year provides an excellent opportunity to cross this financial to-do item off your list—just in time to earn your tax deduction for doing so as well.
The maximum contribution you can make toward your retirement accounts vary with age. People under the age of 50 can contribute up to $19,500 in their 401(k) yearly, and those who are 50 years of age or older can contribute $26,000. These totals include catch-up contributions for those 50 or older, who are allowed to contribute more toward their account in anticipation of retirement being on the horizon. Employer matching contributions do not count toward this limit.
Roth IRA contributions are capped per year at $6,000 (or $7,000 for people 50 years or older). This cap applies to all Roth IRA accounts a person might have, rather than each individual account maxing out at $6,000. Other common retirement account types, such as 403(b) plans for employees of non-profits or self-employed pensions, follow similar guidelines. The maximum 403(b) contribution is the same as the 401(k) maximum, and self-employed pensions max out at 25 percent of your take-home pay through self-employment (or $57,000 if this total is the lower of the two).
You can also make contributions that go towards your previous year’s total if you didn’t max out the year before and make payments within 15 months after tax day. This is a great way to allocate additional cash beyond your yearly maximum if you could not contribute as much the previous year.
2. Take advantage of employer match contributions
Many employer-led 401(k) plans include matching contributions. These can range from a percentage of each dollar an employee contributes to their account or a dollar-for-dollar match, depending on the employer’s policies. Many employers cap these contributions to a specific dollar amount for employees, as well. If your employer offers matching contributions, you’re leaving money on the table by not maxing out your contributions to the amount your employer matching maxes out.
Some employers offer matching contributions equal to a percentage of the employee’s pay. Many employers offer 50 cents for every dollar an employee contributes to their 401k, often maxing somewhere from 4 to 6 percent of their salary. This can add up to sizable contributions towards your retirement account, considering employer contributions amount to essentially free money toward retirement.
3. Revisit your retirement savings goals
The amount of money you need to retire comfortably is a moving target. Inflation, cost of living expenses, lifestyle, and family concerns can all impact the amount you need to enjoy a comfortable retirement. If you set your retirement savings goal and haven’t revisited it, you should take time at the end of the year to review your figures and make sure that they reflect what you’ll actually need to be comfortable.
When looking at your retirement savings target, it’s essential to factor in certain unavoidable expenses. These usually take the form of medical expenses, elder care costs, and the potential for your life expectancy to exceed your current savings calculations. Other factors, such as lifestyle creep, can make you feel accustomed to a particular lifestyle that may be difficult to afford in retirement unless you begin to budget accordingly. Additionally, becoming a grandparent or factoring in economic inflation should also play an important role in your revised calculations. Consider how much you should set aside in an HSA, and what 529 contributions would look like with your budget.
If your target number for retirement doesn’t reflect your new calculations, it might be the right time to consider where you can pull from your budget to bulk up your savings. If you’re eligible for make-up contributions to max out the previous year’s retirement account contributions, or you’re old enough to make catch-up contributions to your retirement accounts, look for ways to do so.
4. Diversify or realign your current investments
Knowing how much you’re saving and investing for retirement every year is a great start to help you make sure you’re on track, but it’s only the first of many. It’s equally important to review your portfolio to make sure that your holdings are maximizing market opportunities.
Reviewing your investments also helps you ensure your asset allocation matches your retirement timeline—a more aggressive portfolio in your early working years is great. Still, a more conservative approach is vital as you get closer to retiring. That’s because you don’t want to risk losing what you’ve worked toward by way of a too aggressive portfolio. Suppose you are exposed to too much risk via direct stock ownership or cryptocurrency. In that case, you may end up losing a sizable chunk of your portfolio’s value—leaving you with less income in retirement.
Rebalancing your portfolio as you get close to retirement is typically a straightforward process. You’ll want to make sure your financial holdings are predominantly steady, low-risk investment types. These include fixed-income funds, municipal or treasury bonds, and ample cash in a money market account. The less exposed you are to Wall Street’s whims, the more comfortable you will likely feel in retirement.
5. Evaluate your year-end gifting strategy
Sometimes saving for retirement means reducing your tax burden as well. If you haven’t taken advantage of tax-advantaged charitable contributions yet for the year, the end of the year is a perfect time to do so.
Making donations to registered charities can go a long way toward lowering your yearly taxes, which can end up saving you money in the long run. Gifting to friends and family up to the tax-free amount can also help you manage your finances before tax season arrives. Depending on where you live, you may also qualify for a tax deduction for money invested in a 529 plan for college savings. Many states offer tax incentives for residents who invest in state-run plans; some even offer tax breaks for other states’ plans. These contributions can help lower your overall income taxes and significantly impact the causes and the people you care about.
The end of the year provides all of us with an opportunity to reflect on what we accomplished. These considerations should also include your finances and retirement goals. Although any time of the year is an excellent one to review your progress toward retirement goals, the end of the year provides an easy reminder to do an annual financial checkup. Consider working with a financial professional to help you with your strategy.
This material is provided by Voya for general and educational purposes only; it is not intended to provide legal, tax, or investment advice. All investments are subject to risk. Please consult an independent tax, legal, or financial professional for specific advice about your individual situation.