This is the time of year that many of us focus on finding the perfect gift for the special people in our lives. But don't forget to reward yourself, too! Saving for the future is one of the most important gifts you can give yourself. And, if you're already contributing to your retirement plan, why not resolve to save even more in 2017?
As a first step, make sure you're enrolled in your company 401(k) plan. If your employer offers a match, your number one priority should be to contribute at least enough to take advantage of it in full if possible. Not doing so is like leaving money on the table. Think of it like this: a 50% match from your company is like earning 50% on the money you contribute. You may come out ahead by getting your match first - then getting rid of high-interest debt you may have.
Second, increase your contributions when you can. A recent survey from Schwab Retirement Plan Services, Inc. found that saving enough money for retirement is the most common cause of financial stress for most people, and about half of respondents feel it is impossible to save enough in their 401(k) for a comfortable retirement. In fact, only 43% of respondents know how much money they may need for a comfortable retirement, which is significantly lower than their awareness of other important "targets," including their ideal credit score, weight or blood pressure.1
Consider increasing your 401(k) contribution by 1% each year or every time you receive a raise or promotion, with the goal of eventually maxing out your contribution - meaning you're contributing all that the government will allow. For 2017, the annual deferral limit on contributions for traditional 401(k) plans is $18,000, plus an extra $6,000 in catch-up contributions for participants 50 or older at the end of the calendar year, if permitted by their 401(k) plan. These amounts represent what you are allowed to contribute in a given year, and don't factor in any employer match.2
Contributions to a traditional 401(k) plan are made with pre-tax dollars, so increasing your contribution rate may not make much difference in your current take-home pay. Based on a hypothetical example, saving just 2% more over a 35-year career could mean additional retirement savings of $148,000 - but the extra 2% would only reduce that biweekly paycheck by $16.3 You can see what the difference would be in your paycheck with this calculator.
Many plans enable you to automatically increase your contributions each year by a certain percentage. This may be a great way to boost your retirement savings rate without having to think about it or take any action. Check if your retirement plan offers this feature. If so, find out if you're automatically enrolled or if you have to sign up for it initially so you don't miss out.
While some gifts have an immediate payoff, others reveal their value as the years go by. You're ultimately responsible for your retirement, so don't miss the opportunity to give yourself the best 401(k) gift of all.
1 This online survey of U.S. 401(k) participants was conducted by Koski Research for Schwab Retirement Plan Services, Inc. Koski Research is neither affiliated with, nor employed by, Schwab Retirement Plan Services, Inc. The survey is based on 1,000 interviews and has a 3 percent margin of error at the 95 percent confidence level. Survey respondents worked for companies with at least 25 employees, were current contributors to their 401(k) plans and were 25-70 years old. Survey respondents were not asked to indicate whether they had 401(k) accounts with Schwab Retirement Plan Services, Inc. All data is self-reported by study participants and is not verified or validated. Respondents participated in the study between June 2 and June 8, 2016.
2 These amounts may be increased in future years for cost-of-living adjustments. Your company may have a maximum match as well as other restrictions. The employer contribution is paid on a pre-tax basis and may be taxable at withdrawal.
3 Hypothetical data are for illustrative purposes only and are not intended to represent past or future performance of any specific investment. The balances shown assume a biweekly pay period; an employee in his or her 30s with $1,000 in their plan, a $52,000 yearly salary, and 35 years until retirement; and annually compounded interest. This example assumes a hypothetical average rate of return of 7%, reinvestment of dividends and capital gains, and no current taxes paid on earnings in a retirement plan account. Schwab Retirement Plan Services, Inc. does not provide tax or legal advice.
This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, you should consult w ith a qualified tax advisor, CPA, financial planner or investment manager.
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