Dear Carrie, I'm facing my 50th birthday and am embarrassed (and a bit panicked) that I've saved very little for retirement. I have a 401(k) but there's not much in it. What should I do? Is it hopeless? — A Reader
Dear Reader, Your situation isn't hopeless — nor is it uncommon — but it certainly should be a wake-up call. Ideally, everyone should begin thinking about retirement with their first paycheck, but the reality is that many people don't start to seriously save (or panic) until much later.
In fact, according to statistics from the Federal Reserve, in 2016, the median value of retirement accounts for families with a head of household between the ages of 45 and 53 was only $82,600. For ages 55 to 64, the median was $120,000 and $126,000 for those between 65 and 74. In today's economy, that's not going to go very far.
Obviously for anyone in your situation, saving now has to be your middle name. But it's not just about putting away extra dollars. There are tax-advantaged ways to save that can help you get farther faster.
Since you have a 401(k), this should be your workhorse. In my opinion, everyone should contribute enough to at least capture any company match that's available to them. That automatically puts extra dollars in your pocket. In a situation like yours, I'd go a step further and try to contribute the maximum allowed if you can.
The 2018 401(k) contribution limit is $18,500 plus an extra $6,000 once you turn 50 for a total potential savings of $24,500 a year. Your employer may limit your contributions to a percentage of your gross salary, so first find out how much your specific 401(k) plan allows, and then go for the max.
Yes, it will be a chunk of money, but if you can — do it. Contributions to a traditional 401(k) are generally taken out of your paycheck on a pre-tax basis, which reduces your taxable income. And since the money is taken out of your paycheck automatically, once you adjust to the monthly difference, it won't seem like such a hit.
Plus, this money can grow tax-deferred until you withdraw it. So don't let it sit idle. Make sure it's invested across a mix of stocks, bonds and cash that matches your feelings about risk and your capacity to take risk. If you're unsure, get some investing help, either through your plan or an independent financial advisor.
If you want to feel better about any sacrifice you're making now, use an online retirement calculator to estimate how much you could have at the end of 15 years. For example, if you save $24,500 a year from now until you're 65 and get a hypothetical average annual return of 6 percent, you could end up with about $570,000. How's that for motivation?
Once you've set your 401(k) in motion, you would ideally save even more in either a traditional or Roth IRA. Total IRA contributions are capped at $5,500 for 2018, with a $1,000 catch-up for age 50 and over. Your money can grow tax-deferred in either account, but there are a couple of things to consider that may make one or the other the better choice for you.
A traditional IRA can make more sense if your contributions are tax-deductible. When you're an active participant in a 401(k) or other company sponsored plan, tax deductibility is phased out at certain income levels, currently $63,000 to $73,000 for single filers and $101,000 to $121,000 for married filing jointly.
While contributions to a Roth IRA aren't tax-deductible, any earnings are tax-free, so you're still getting a tax advantage. However, there are also income limitations to contribute fully to a Roth: $120,000 to 135,000 for single filers and $189,000 to $199,000 for married filing jointly.
If neither a traditional nor a Roth IRA work for you, funneling your extra savings to a regular brokerage account is also a good choice. There's no upfront tax advantage or tax deferral of potential growth, but any long-term capital gains from the sale of stock are generally taxed at a lower rate than ordinary income tax rates depending on your personal tax bracket.
There's no way around it — you simply have to save more, starting right now. You can make it easier on yourself by refining your budget, paying off high-interest debt, and putting deposits into your retirement accounts on automatic so you're not tempted to spend the money somewhere else. Working longer is also perhaps the best way to expand your savings, while at the same time decreasing the number of years you will depend on that income.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can e-mail Carrie at askcarrie@schwab.com The Charles Schwab Foundation is a 501(c)(3) nonprofit, private foundation that is not part of Charles Schwab & Co., Inc., or its parent company, The Charles Schwab Corporation. The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. Investors should consider, before investing in a 529 plan, whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available in such state's qualified tuition program.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness or reliability cannot be guaranteed. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
DIST BY CREATORS SYNDICATE, INC. (0818-8ZD9)
View Comments