In a recent post, I pointed out that most employees are not contributing enough to their 401(k) plan accounts to fund a retirement that doesn’t require reducing our standard of living.
Many of us, when faced with that reality, struggle with how we could possibly save more. But there are a number of ways workers can meaningfully begin saving more today for their retirement — and employers are wise to help them by sharing these tips.
Here are seven ideas employers can share with their employees to help them save more for their post-work years.
1. Increase your 401(k) contribution percentage whenever you get a raise. This is the simplest and most effective way for employees to significantly increase the amount they save. If you receive a 4% raise, for example, increase your 401(k) plan contribution percentage by 2%.
Most of us have difficulty with the concept of saving more because we can’t imagine having a smaller paycheck to live on. This approach guarantees that you will save more and end up with a larger paycheck. Every one of us should practice this saving habit every time we get a raise.
2. Capture all the employer match. Studies show that at least 20% of 401(k) plan participants are not contributing enough to receive all of the matching contribution dollars their employer is willing to give them.
Do you know what the risk-free return is on a 100% matching contribution from your employer? Yep, this is simple math, 100%. Risk-free. There is no better investment these participants can make than capturing additional employer matching dollars.
Research also indicates that the majority of these participants are within 1% to 2% of receiving their employer’s full match. In other words, if they raise their contribution percentages by 1% each time they get a raise over the next two years, they will begin collecting the full match.
Are you receiving the maximum employer matching contributions you are entitled to? Here’s a quick test: If you can’t recall your company’s matching contribution formula (e.g., 50% of the first 6% of employee contributions), you might not be. Check with your benefits department to find out the current match and verify how much you are contributing.
3. Contribute at a higher rate from a bonus. Most employers will allow you to adjust your 401(k) contribution percentage to contribute at a higher rate from bonus pay. Don’t worry, you can go back down to your former rate the next pay period.
Since most 401(k) plans now permit contribution rates of up to 80% (or higher), e be afraid to contribute a large portion (20%, 30% or more) of your bonus check to your 401(k) plan account.
4. Fully fund your HSA account. Employees who have a high-deductible health plan through work will likely also have access to a health savings account. These are amazing accounts for a number of reasons.
First, they are triple tax-free. Not tax-advantaged — tax-free. When you make payroll contributions into these accounts, no federal, state, Social Security or Medicare taxes are withheld. Balances in HSAs accumulate tax-free, and no taxes are deducted from distributions when they are used to pay qualified expenses.
But wait, there’s more: If you don’t use up your entire HSA balance in a year, any remaining dollars are rolled forward into the new year. Balances are not forfeited as they are in flexible spending accounts.
Not done yet.
You can accumulate and roll forward these balances into your retirement and use them to pay healthcare expenses. They can pay for prescription drugs, medical premiums, COBRA insurance premiums, dental expenses, Medicare premiums, long-term care insurance premiums and, of course, any co-pays, deductibles and co-insurance amounts.
The most tax-efficient way to fund retirement healthcare expenses is via an HSA. It is unfortunate that contribution limits are not higher.
5. Make IRA contributions. If an employee is contributing the maximum amount to the employer’s 401(k) plan, or if you have a spouse who does not have access to an employer retirement plan, think about making contributions to an individual retirement account.
With at least one-third of the American workforce now gig economy employees who don’t have access to employer-provided benefits (gig economy workers are expected to grow to 43% of the U.S. workforce by 2020), this retirement savings strategy is likely to increase in popularity.
If you cannot make deductible contributions into a traditional IRA because you don’t meet the eligibility criteria, investigate making Roth IRA contributions instead.
6. Make catch-up contributions. If you are 50 or older, you can contribute up to an additional $6,000 in 2018 above the IRS 401(k) contribution limit of $18,500.
For those of us who are panicking now that we can see retirement will become a reality soon, this is a way to try to make up for those years when we didn’t contribute enough.
7. Use the Saver’s Credit. The Saver’s Credit is designed to motivate low- and middle-income workers to save for their retirements. The credit can be worth up to $1,000 in 2018 and comes in the form of a tax credit when you file your taxes.
To receive the credit, you need to make contributions to a retirement plan or IRA during the year. Income limitations apply. This is another retirement strategy that gig workers should evaluate. Contributions to both traditional and Roth IRA accounts qualify.
Most of us can take advantage of at least one of these strategies right now. I hope one works for you.
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