This article was published in the New Haven Register on November 24, 2018.
If you’re still working, one of the most effective ways to save for your retirement years is to maximize contributions to your IRA and to your workplace retirement plan, especially if your employer adds matching dollars to your account.
The Internal Revenue Service recently increased the amount of money you are allowed to contribute to various retirement accounts starting in 2019, so make sure you bring your contribution up to the new maximum amount.
For 401(k), 403(b) and most 457(b) plans, the limit will rise from $18,500 to $19,000 for the year. For IRAs (Individual Retirement Accounts), the limit will rise from $5,500 to $6,000.
The catch-up contribution limit for those over age 50 will remain at $6,000, meaning you can add that much more on top of the regular limit. This applies to most retirement accounts, but it does get tricky: For instance, if you have a SIMPLE IRA or a SIMPLE 401(k) plan, the catch-up contribution limit is just $3,000. And if you have worked for 15 years or more and have a 403(b) plan (for public school or nonprofit employees), your catch-up limit may be much higher.
The rules for 457(b) plans (for government employees) are even trickier, with potentially higher catch-up limits for employees within three years of retirement.
The increases for 2019 may not sound like a lot, but when it comes to saving for your retirement, every dollar helps. This is especially true for younger workers, who have more years ahead of them for the power of compound investing to work.
Fidelity provides examples of the difference it can make to add just one percent more to a 401(k) or other retirement plan. By adding $12 a week to her savings plan, a woman age 35 earning $60,000 a year would add $85,492 to her nest egg by retirement age, assuming an annual investment growth rate of 5.5 percent and a nominal salary increase rate of 4 percent.
Older workers can help their cause, as well: Based on the same assumptions as above, a 55-year-old woman earning $80,000 per year would add $16,799 to her retirement savings for every $16 in additional weekly contributions.
A recent Fidelity survey shows that half of Americans are at risk of being unable to cover essential expenses after they retire. Only 32 percent of Americans are on target to cover 95 percent of essential expenses.
To get yourself into the “on target” zone, increase savings any way you can, review your asset mix with the help of a financial planner, and create a retirement plan based on your estimated expenses post-retirement.