If you're looking ahead to the future but you’re feeling a bit shaky about your retirement savings, you’re not alone. According to a February 2021 research report by the National Institute on Retirement Security, 56% of respondents said they’re worried about achieving a financially secure retirement.
If your savings fell short in 2021, the new year is a great time to get back on track and reach your retirement goals. The Penny Hoarder has rounded up a few tips to help get you there.
Stepping up your retirement savings now — before 2021 ends — could give you a nice tax gift next year.
That’s because contributions made to your 401(k) before Dec. 31 help lower your yearly taxable income.
It’s not a tax credit or deduction, but by lowering your taxable income you could save money at tax time — or even boost your refund.
The maximum you can contribute to a 401(k) in 2021 is $19,500 — or $26,000 if you’re 50 or older — by the end of the year.
Not everyone has access to a 401(k). In fact, 33% of all private industry workers lacked access to any sort of employer-provided retirement plan in 2020, according to the Bureau of Labor Statistics. If that’s your situation, you can still save for retirement on your own. And we promise, it’s not as scary as it sounds.
Robo-advisors are online companies that use computer algorithms and advanced software to build and manage your investment portfolio. They take the guesswork out of investing by picking stocks and bonds that align with your risk tolerance and financial goals.
The best robo-advisors on the market give you access to tax-advantaged individual retirement accounts (IRAs). You can set one up in less than 20 minutes without ever picking up the phone or speaking with an actual person.
Companies like Wealthfront and Betterment give you the option to open either a traditional IRA or a Roth IRA when you create your account. Both accounts let you contribute up to $6,000 a year in 2022, or $7,000 for people 50 and older. Roth and traditional IRAs also come with sweet tax perks. But how and when you get a tax break is different. As a quick reminder:
Taxes aren’t withheld when you put money in and your contributions lower your yearly taxable income (like a traditional 401(k) does). However, you’ll get a tax bite on the backend when you withdraw money in retirement. If you tap your account funds before age 59.5, you’ll pay a 10% IRS penalty.
The government takes out taxes when you fund your account and contributions don’t help lower your yearly taxable income. But you won’t pay any taxes when you withdraw money in retirement. Plus you can withdraw your contributions at any time with no taxes or penalties.
Using a robo-advisor is a super easy way to start saving for retirement because it can help you decide if a traditional or Roth option is better for you. The robo-advisor will fill your IRA with diversified, long-term investments and offer easy-to-use online tools that make retirement planning interactive and accessible.
Unlike a traditional 401(k), your IRA contribution deadline is April 15, 2022. If you don’t hit the $6,000 contribution cap this year and you’re worried about a 2022 tax bite, you can add money to your traditional IRA no later than April 15.
Likewise, if you meant to start an IRA this year but forgot, you can still open an account and fund it in 2022 — but count the contributions toward 2021.
If you’re a gig worker or self-employed, the word retirement might make you laugh. You don’t get the option of opening a standard 401(k) at work so it may be difficult to know where to start. Thankfully, there are five different retirement accounts for small business owners, self-employed people and individual contractors.
• Traditional IRA
• Roth IRA
• Solo 401(k)
• SEP IRA
• Simple IRA
A solo 401(k) is an individual 401(k) specifically designed for a business owner with no employees.
It lets you serve as both an employer and an employee — and make contributions in both capacities. The contribution limit is very high: $61,000 in combined employee and employer contributions in 2022. Solo 401(k)s also come in both Roth and traditional forms, so you’ll have your choice on tax savings.
Another option is a SEP IRA. Unlike a solo 401(k), you can add a few employees to a SEP IRA. Or you can use it just for yourself. For a self-employed person, you can contribute up to 25% of your net earnings to a SEP IRA, up to a max of $61,000 in 2022.
As always, don’t contribute more than you can afford. Look at your cash flow and business expenses for the year to decide how much you can comfortably put away each month.
4. Don’t Panic Sell or Withdraw Money Early
Selling investments is literally one of the worst things you can do with your 401(k) when the market drops.
Many people learned this lesson around March 2020 when the stock market nosedived — only to rebound a month or two later. Remember this: The losses you see inside your retirement account aren’t actual losses until you sell. If you simply wait for the market to recover, your investments will go back up.
A single day — or even a few weeks — of volatility shouldn’t change your long-term savings plan.
A down market is not a time to panic. In fact, smart investors see it as a time to buy.
Cullen Roche, a Wall Street pro and founder of Orcam Financial Group, summarized it nicely:
“The stock market is the only market where things go on sale and all the customers run out of the store.”
If there’s a crash in 2022 and you have extra cash on hand, consider transferring some to your retirement account. This lets you buy additional shares when prices are low. Then again, timing the market is tricky. A better long-term strategy is dollar-cost averaging, where you invest on a regular schedule no matter what’s happening in the stock market.
If you have money automatically deducted from your paycheck and deposited into your 401(k) or IRA, you’re already practicing dollar-cost averaging. You’re investing on a regular schedule (each time you get paid).
No matter what strategy you choose, don’t withdraw money from traditional retirement accounts early unless it’s a true emergency.
Inflation ramped up in 2021 — and it might stick around for a while in 2022. Investors tend to shy away from bonds when inflation is high. But some bonds, like Series I bonds from the U.S. Treasury, offer interest rates indexed to inflation. That means their interest payments increase as inflation increases.
In November 2021, the government set an eye-popping interest rate of 7.12% on I bonds purchased now through April 2022. That 7.12% interest rate won’t last forever. The Treasury will calculate a new I bond rate May 1, 2021. If inflation continues to heat up, you could get even more interest on your bonds. If it cools off, your interest rate declines — although you can’t lose money with I bonds. You just might not earn much interest for six months.
There are a couple ways I bonds can help boost your retirement savings. If you’re a young, risk-taking investor with a stock-heavy portfolio, you can diversify with a safe asset like I bonds. Or if you’re an older investor planning to retire in the next two to 10 years, I bonds provide a risk-free place to stash cash while earning a much higher return than CDs or savings accounts.
You can’t buy I bonds through your 401(k) plan or an online broker. You have to purchase them online from the U.S. Treasury Direct website. You can also choose to receive part of your tax refund in paper I bonds.
You can buy up to $10,000 worth of I bonds each year — but you have to wait at least a year after purchase to cash them in. If you decide to buy, make sure you absolutely don’t need access to the money until at least 2023.
It may never feel like the right time to get started saving for retirement. It might be confusing and intimidating to open your first 401(k) or IRA. But the only way to overcome those fears is to jump in and get started.
We have easy-to-follow strategies for how to save for retirement whether you’re in your 20s or your 60s.
Boosting your retirement savings doesn’t need to be dramatic or life-altering. If you received a raise at work this year, for example, use a percentage of it to fund your future.
Even setting aside $10 or $20 more from each paycheck next year can make a huge difference. The worst thing you can do is nothing. Ditch the excuses in 2022 and start contributing what you can reasonably afford to your retirement. You’ll thank yourself later.