No matter your current age, retirement is something that should be on your mind in some way, shape or form. Whether you are younger and just starting out in the workforce, or getting closer to retirement, what you choose to do can greatly affect your future. There are a few ways to maximize the benefits of your retirement account that we should all be thinking about.
If you have the means to do so, maximizing the contributions to your retirement accounts can really help you out tremendously in the long run. Here is the basic breakdown of the maximum you can contribute in 2019, according to the new IRS rules:
- $19,000 for 401(k), 403 (b), Thrift Savings Plan & some 457 plans
- $6,000 for IRA’s
- $1,000 for catch up contributions over the age of 50
The IRS increased some of the contribution limits going into 2019, which should help a lot of Americans save more faster. But this only helps if you can contribute the full amount.
If you can’t do that, then your first step should be working on getting back on track with your budget. Getting back into your budget can help you see if, and where, you can cut expenses.
TAKING ADVANTAGE OF MATCHING
If you do have the benefit of working for somebody else AND they offer to match for retirement contributions, then definitely take advantage of that. Every company is structured differently, and it is completely up to each company how they decide to offer matching, if they do at all.
Here are some of the most common ways you might run across a matching option:
- $.50 on the dollar for the first 3-5% you contribute
- 2.7% of your pay, on average
- 100% match up to the first 3-5% you contribute
I know, that I personally have worked for companies that offered the 3rd option. I really wish that I had paid closer attention in my youth and contributed the maximum amount possible. As they say, hindsight is 20/20. I have been kicking my older and wiser self for years now about this mistake. Please don’t follow in my misguided footsteps!
A SEP IRA is a great way to contribute to a retirement account when you are self-employed. This type of account is similar to an IRA, except that you can contribute more to it than a Roth IRA or Traditional IRA.
Currently, if you open a SEP IRA, you can contribute up to 25% of your income or $56,000, whichever one happens to be less. Not only that but you won’t be taxed on anything until you begin withdrawing funds in retirement. So this can be a really great way to maximize the benefits of retirement and save more along the way.
GIFT YOUR FUTURE SELF
Instead of buying holiday presents for your loved one and yourself, contribute to your retirement accounts. I realize this sounds like an odd gift to give yourself, but hear me out.
Most of the presents we purchase for ourselves or spouses are outdated in a short period of time. Instead of doing that what if we put that money into our retirement accounts (whichever accounts you have). We could have a much happier retirement. We could also potentially retire much earlier than we would have been able to if we didn’t put those extra funds into our retirement. This is due to the magic of compounding!
Here is a good example of what that might look like, using a compounding calculator:
- Let’s say you and your spouse spend a total of $600 on holiday gifts for each other, per year.
- When you are 30, you start gifting this money to your future selves via a retirement account each year instead.
- The average rate of interest earned is 7% annually (of course this fluctuates greatly, depending on the market).
- You plan to save this extra $600 a year, for the next 35 years, to retire at age 65.
- You will then have an extra $88,280 in your retirement account.
- This means you could potentially retire one to two years earlier!
I don’t know about you, but this sounds like a much better gift to me.
BEST RETIREMENT AGE
When you choose to retire can have a huge effect on how much retirement you can take. This is not only related to Social Security but also your Roth IRA and/or 401(k).
With regards to Social Security, you can start getting 100% of your benefits when you are 66. If you wait until age 70, you can get up to 132% of your Social Security benefits. That sounds like a much better deal to me!
You can start making penalty-free withdrawals from a Roth IRA or Traditional IRA when you are 59 1/2. You can continue to contribute to these plans until you are 70 1/2, if you still have earned income until then.
Even though you can start withdrawing that early, it seems like it makes more financial sense to wait until age 70 to begin retirement. Especially, if you are counting on Social Security being a large factor of your retirement plan.
WHERE YOU LIVE MATTERS
When you do get to the point that you’ve decided to retire, where you choose to live does matter. It actually matters a lot! This is due to the fact that there are 37 states that do NOT tax social security income. Yes, you heard me correctly!
What this means to you, is that if you want more bang for your buck when you retire, then you should consider where you live. Or, better said, where you choose to live when you retire.
Don’t just look at which states are social security income friendly though. You will want to take a look at the property taxes, state and local taxes and taxes on other retirement income. These aspects are crucial to the overall equation in order to maximize your benefits in retirement.
Overall, what you do now with your retirement account directly impacts your future self. There are benefits of your retirement account. Whether you begin contributing more due to the new maximum contributions limits. Taking advantage of employer matching at your job, open a SEP IRA if you are self-employed, or gift your future self instead of your current self, all of these things will help you tremendously in the long run.
If you are closer to retirement and have already made all of these great strides to get you there, then bravo! Just remember to figure out what the optimal age is for you to retire and get the most benefits, as well as pick somewhere to live that is more retirement friendly.
If you make retirement more of a regular part of your financial routine, then you will definitely be maximizing the benefits you can get from your retirement accounts.
This article was written by Shanah Bell from Everything Finance and was licensed from NewsCred, Inc. Santander Bank does not provide financial, tax or legal advice and the information contained in this article does not constitute tax, legal or financial advice. Santander Bank does not make any claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained in this article. Readers should consult their own attorneys or other tax advisors regarding any financial strategies mentioned in this article. These materials are for informational purposes only and do not necessarily reflect the views or endorsement of Santander Bank.