People often don't save enough for retirement. The average American has less than $250,000 saved for retirement by the time they are ready to leave their jobs at 65.
Retirement guidance often cites the four percent rule which states that you should not withdraw more than 4% of your savings per year during retirement. Even if you have $250,000 saved, 4% of that is just $10,000 per year.
Being able to withdraw only $10,000 per year is woefully inadequate even with other retirement benefits such as social security. Fortunately, you can boost your retirement savings rate to live a comfortable life once you quit your job.
With 42% of Americans saying they will be broke when they reach retirement age according to the chart below, now is the time to find the best retirement saving solutions.
Contribute Right Now
The first step to boost your retirement savings is start contributing to your 401(k) immediately. Assuming you are participating in your company's retirement plan, check your expenses and see if there are places to cut. Direct that money into your retirement funds.
Often employers will match your 401(k) contributions so check with your employer and ensure you are getting the match. If you're already maximizing your 401(k) contributions, consider opening up an IRA. Remember that you can contribute to your spouse's IRA as well, even if that spouse isn't working.
By investing right now, no matter how old you may be, you can take advantage of compounding returns until your retirement age. Those extra years make a big difference in your final 401(k) balance.
Not having enough money is often the most used reasons as to why people aren’t saving for retirement, it’s vital to find alternative ways to boost your savings.
Take Advantage of Catch Up Contributions
For people 50 or older, the IRS lets you contribute additional funds to your 401(k) and IRA. As of 2019, those extra contribution allowances add up to $7,000 a year.
Increasing your contributions by $7,000 per year for 15 years at age 50 would get you $173,000 extra assuming a 5% rate of return. Taking advantage of those higher contribution limits can be critical to ensuring you have enough money to establish a solid retirement savings.
Open a SEP IRA
Opening a SEP IRA is huge for high-wealth earners and those that moonlight. The SEP IRA (simplified employee pension individual retirement arrangement) is available to business owners who have less than five employees.
It is a profit-sharing plan so any contributions you make must be split equally amongst employees. You can defer 20% of your income up to a maximum of $53,000 a year with this plan.
The way SEP IRA plans work can be a little confusing so consider the following example. Suppose you work a full-time job and own a few properties on the side.
Further, suppose those properties generate $250,000 of income per year. You contribute the maximum to your employer's 401(k) for a total of $18,000 per year in addition to $5,000 in your IRA.
If you own the rental properties in your name, that would be the maximum you could defer. However, if you own an LLC that owns those properties, you could set up a SEP IRA through your company.
As you are the only employee, you could defer 20% or $50,000 of income tax-free into your SEP plan as well. Combining the two IRAs and the 401(k) allows you to contribute an incredible $73,000 per year!
There are multiple ways to boost your retirement savings including prudent and wise planning, but speaking with a financial advisor can help people implement a retirement savings plan for their needs.
To help potential retirees find investments to boost their retirement savings, make sure to consult a financial advisor, like Matt Logan, who can help maneuver your investments through various markets.
Matt Logan is experienced with helping clients reach their retirement goals. If you need help increasing your retirement savings through proven financial strategies, please reach out to Matt Logan to see how he can enhance your retirement portfolio. Give a call today: 336-540-9700.