Are you on track to save enough for retirement in 2019? Is your 401(k) invested properly? Are you taking full advantage of the tax-advantaged retirement savings tools at your disposal? Here's what you should know about these retirement savings topics, along with a few other tips, as you plan your retirement savings strategy in 2019 and beyond.
Contribute enough to get your employer's match
About 20% of Americans are making a terrible retirement mistake by not taking advantage of their employer's matching contributions. Choosing not to contribute enough to get the full match is literally turning down free money.
One common culprit is 401(k) plans that auto-enroll new employees, which is typically done at a low contribution rate. For example, if your employer is willing to match contributions of as much as 5% of your salary, but you're auto-enrolled at a 2% contribution rate, you're leaving a lot of money on the table unless you make the effort to adjust your contributions.
Getting the match isn't enough
Contributing as much to your 401(k) or 403(b) plan as your employer is willing to match is a good start, but it's by no means enough. Many financial planners, including myself, suggest saving at least 10% of your compensation in tax-advantaged accounts for retirement -- not including any matching contributions your employer makes on your behalf.
This doesn't necessarily mean you need to contribute 10% of your salary to your 401(k). Once you've maxed out your employer match, it could be a smart idea to open an IRA if you qualify. An IRA gives you the flexibility to invest in virtually any stocks, bonds, or funds you want with your retirement savings. Traditional IRAs have the same tax benefits as pre-tax 401(k) contributions, and Roth IRAs allow you to avoid paying taxes after you retire.
You also don't need to get to the 10% savings rate immediately. One popular strategy involves increasing your contribution rate by 1 percentage point per year until you reach your goal, for example. However, the point is that if you have a single-digit retirement savings rate, it may be a smart idea to rethink your strategy.
Keep asset allocation in mind
Saving enough money is only half of the battle -- once you set money aside for retirement, you need to make sure it's invested properly.
Here's a quick asset allocation check for you. Subtract your current age from 110. This tells you the approximate percentage of your assets that should be in stock (equity) investments in order to balance long-term growth potential and risk. For example, if you're 40, this implies that roughly 70% of your retirement investments should be in stock-based funds or other equities.
If you're just getting started with retirement savings or haven't made any changes to your 401(k) investments in a while, now is a good time to do an asset allocation checkup. And be sure to do this every few years going forward.
Use an HSA if you can
If you have a qualifying high-deductible health plan, a health savings account, or HSA, can be your best friend as a retirement saver, so take advantage.
Money you contribute to an HSA is tax-deductible, just like the money you save in your 401(k). But unlike a flexible spending account (FSA), money saved in an HSA can be invested (similarly to a 401(k)) and is allowed to grow and compound on a tax-deferred basis and can be rolled over from year to year. And if you use the money in your HSA for qualified medical expenses, your withdrawals will be 100% tax-free, as well -- giving HSAs a unique triple-tax benefit that other types of accounts simply don't have.
Fidelity estimates that the average 65-year-old couple retiring in 2018 will spend $280,000 on out-of-pocket healthcare expenses throughout their retirement, so by setting money aside regularly in your HSA, you can help reduce this burden later in life.
Take advantage of catch-up contributions
Finally, if you're 50 or older, it's important to realize that you can contribute more to your retirement accounts than younger Americans.
For example, if you're contributing to an IRA, the 2019 limit is $6,000 for most Americans, but savers who are 50 or older can make an additional $1,000 catch-up contribution. For 401(k)s and similar retirement plans, it's even more generous. The 2019 401(k) contribution limit is $19,000 for elective deferrals but rises to $25,000 if you've reached your 50th birthday.
In other words, the IRS allows older Americans to save more aggressively. Take advantage.
Keep this in mind from now until you retire
As the headline of this article suggests, these tips aren't just for 2019. They should be used in 2019 and each year going forward as you move toward retirement. Some of the figures, like the IRA and 401(k) contribution limits, are likely to change as time goes on, but these five concepts are evergreen.
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