It’s not news to anyone even half-awake that Americans aren’t saving enough for retirement. You can’t go a week without reading another report that retirement savings are down and household debt is up.
It’s also hard to avoid the same old advice: spend less, save more, and pay off debt. But according to the non-partisan U.S. Government Accountability Office (GAO), "about half of households age 55 and older have no retirement savings (such as in a 401(k) plan or an IRA)."
Clearly, the standard advice isn’t working. What’s the alternative for successful retirement savings? Here are seven retirement savings suggestions you may not know.
Whether you have no retirement savings or little retirement savings, start today to make retirement savings a priority.
Opening a company-sponsored retirement account with your employer and opening a Traditional or Roth Individual Retirement Account (IRA) online both only take a little effort. It may seem daunting, but it has never been easier. Of course, those retirement plans aren’t your only options.
The best way to highlight this is an example. The maximum IRA contribution limit for 2017 for those under age 50 is $5,500. See the results of a conservative 7% annual return on one year’s worth of maxed out IRA contributions based on the number of years until retirement:
|Years until retirement||Return including principle|
Therefore, if a new worker, just out of college with about 40 years until they reach the traditional retirement age of 65, maxes out their IRA contributions their first year and makes no other contribution for as long as they work, they’ll have $82,360 saved for retirement at age 65. On the other hand, if a worker who has ten years until they retire only maxes out their IRA contributions this year, they’ll have $10,819. To be sure, $10,819 is better than nothing, but these examples show the value of time in the market.
Play catch-up with IRA catch-up contributions
The U.S. government knows that, for any number of reasons, many Americans delay retirement savings. That’s why just a few years ago, the Internal Revenue Service (IRS) implemented IRA catch-up contribution limits for those over the age of 50.
The benefits are two-fold. The first is that catch-up contributions let individuals make up for the years they didn’t invest at all or enough. The second is that it lets even those who have consistently made retirement contributions over their lifetime make a mad sprint to the finish during what is often their prime earning and lower spending years.
The Traditional and Roth IRA contribution limit for 2017 for those under the age of 50 is $5,500. The catch-up contribution limit for those 50 years old and over is $6,500.
Continuing our example above, an extra $1,000 only added once to an IRA at the age of 50 would grow to $2,759 over 15 years when the worker reaches 65 years old. An extra $1,000 a year contributed each year between the ages of 50 and 65 would be an additional $29,647. Just for fun, $6,500 a year added each year between the ages of 50 and 65 would be $192,706.
Contribute to a 457-retirement plan
Certain workers qualify to contribute to a 457-retirement plan. If you don’t know what a 457-retirement plan is, you’re not alone. Most people don’t.
A 457-retirement plan lets certain workers, often government employees, teachers, healthcare workers, and some non-profit employees, contribute up to $18,000 as of 2017. The employer must be considered a state or local government agency or a tax-exempt organization under IRC 501(c)(3).
Contributions to a 457-retirement plan can be in addition to other retirement plans available to such workers, such as 403(b)s and IRA accounts. Like Roth IRA contributions, 457-retirement plan contributions and earnings are both tax-deferred.
Therefore, a worker with access to a 403(b) plan, 457-plan, and a Roth IRA could, in theory, contribute as much as $41,500 if they’re under the age of 50 and up to $42,500 if they’re over the age of 50. Many may scoff that those with access to a 457-retirement plan – government workers, teachers and non-profit workers – don’t earn enough money to contribute up to $42,500 a year. In isolation that may be true, but these workers should consider their entire financial picture, including their partner or spouse’s income, other income and money from an inheritance, insurance, and other sources.
Retirement savings tax credit
There’s another little-known retirement savings secret available to middle- and lower-income earners. That is the Retirement Savings Tax Credit. The Retirement Savings Tax Credit is available to single filers with an Adjusted Gross Income (AGI) of $31,000 a year and joint filers with an Adjusted Gross Household Income of $62,000. They may claim a tax credit up to 50% of their retirement plan contribution with a maximum of $2,000 per single filer, $4,000 for joint filers.
|Credit Rate||Single Filers||Joint Filers|
|50% of your contribution||AGI not more than $18,500||AGI not more than $37,000|
|20% of your contribution||$18,501 - $20,000||$37,001 - $40,000/td>|
|10% of your contribution||$20,001 - $31,000||$40,001 - $62,000/td>|
|0% of your contribution||More than $31,000||More than $62,000/td>|
Your Adjusted Gross Income is your total gross income minus certain deductions. The Retirement Savings Tax Credit can lower your tax bill, help you keep more of your money and, hopefully, keep more of your money to work for you.
Health Savings Account
A Health-Savings Account (HSA) is a tax-exempt medical savings account available to American taxpayers. Like a 401(k) and 403(b), contributions into an HSA account are made tax-free. However, unlike 401(k)s and 403(b)s, qualified medical distributions are also made tax-free.
The HSA 2017 contribution limit for those who qualify is $3,400 for individuals or $6,750 for families. The HSA catch-up contribution of an additional $1,000 is available to those 55 and older.
For most people, health care will be their highest expense in retirement. The more you can save to cover these costs the more financially secure you’ll be in retirement.
Medicare Advantage Plan
Most Americans have at least heard of Medicare Part A and Medicare Part B. Many, though, aren’t familiar with Medicare Advantage Plans. Medicare Advantage Plans, sometimes called Medicare Part C, unlike Part A and Part B, is offered through private companies approved by Medicare.
Just like Parts A and B, Medicare Advantage offers seniors hospital and medical coverage. Also, Medicare Advantage sometimes offers seniors prescription-drug coverage and even dental care and gym memberships.
Why would a retiree not use Medicare Advantage? There are two reasons. The first is that navigating Medicare Advantage Plans can be confusing and often seniors don’t fully understand their plan. The second is that, while most networks within Medicare Advantage Plans are quite large, visiting a doctor outside of the available network can be extremely expensive.
For many who understand their plan and use it within its parameters, the benefits and savings can be worth it. However, not following the plan and using it outside of its parameters defeat its purpose. Therefore, do your research and get help from friends, family, and professionals, as needed.
Delay taking Social Security
For many, retiring early is a dream. Many rely on Social Security to make their retirement dreams come true. You can start taking distributions from Social Security at age 62, but you may not want to do that.
Because you’d be withdrawing four years early, at age 62, you’ll only get 75% of the monthly benefit. Even at age 65, you’ll only get 93.3% of the monthly benefit. It’s not until you reach age 66 that you’ll qualify for 100% of the monthly Social Security benefit. The benefits of waiting don’t stop there, though. For every year beyond at 66 that you delay receiving benefits up to age 70, your monthly benefits will grow 8%.
You may not want to wait until you’re 70 to receive your benefits, but there may be a reason to do so. Be clear about what you may be giving up by tapping into Social Security before you reach age 70 and make sure you have the resources to do so.
Navigating the retirement savings may seem daunting. If you haven’t talked with a financial planner, you may want to do so. Between your research and their expertise, you should be able to create the right plan for you. But, again, it all starts with starting. Keep time on your side and get started today.