Retirement savers now have considerably larger nest eggs than they did at the end of 2009, mostly due to continued saving. But most people still aren't saving enough to sustain for a 30-year retirement. Here are some New Year's resolutions to help you better prepare:
Take advantage of tax breaks. The government offers several types of tax incentives to workers who are saving for retirement. "Every dollar you put away for retirement, you are getting a gift from the government in the form of a tax deduction," says Jeff Feldman, a certified financial planner for Rochester Financial Services in Pittsford, N.Y. "When you put your money in traditional 401(k)s and IRAs and get the tax deduction, it really allows you to put away more money." Workers can defer income tax on up to $16,500 in a 401(k) and $5,000 in an IRA in 2011. For workers age 50 and older, those limits jump to $22,000 and $6,000, respectively.
Claim your 401(k) match. Think of an employer 401(k) match as a guaranteed return on your investment. "Everyone who is offered one of these plans should strive to save at least enough to get the 401(k) match," says Mark Gilbert, a financial planner and certified public accountant for Reason Financial Advisors in Naperville, Ill. The most common employer 401(k) contribution is 50 cents for each dollar an employee saves up to 6 percent of pay. Under this matching formula, an employee who earns $50,000 annually and saves $3,000 in the 401(k) plan will get an extra $1,500 from his or her employer as a 401(k) match.
Save 1 percent more. In 2011, consider dialing up your 401(k) contributions by 1 or 2 percent. A majority of 401(k) participants (87 percent) say they could afford to increase their annual contribution by 1 percent, according to a recent ING Retirement Research Institute and Mathew Greenwald and Associates online survey. And more than half (59 percent) of the retirement savers surveyed report that they could afford to save 3 percent more. "If you can gradually increase your contributions by 1 or 2 percent at a time, that will pay off in a big way," says Judith McNary, a certified financial planner for McNary Financial Planning in Broomfield, Colo. "Set up automatic deposits so that you don't even see it."
Consider a Roth account. In addition to utilizing traditional tax-deferred retirement accounts, consider pre-paying the tax on some of your retirement savings by using a Roth account. "If you don't touch that money for at least five years and you don't begin withdrawals until you are 59½ or older, you will never again have to pay taxes on the balances," says Gilbert. "It's an especially attractive option if you are starting out in your career or are otherwise in a low tax bracket and you expect to be in a higher tax bracket when you make withdrawals." Roth accounts also give you more flexibility in retirement because withdrawals are not required after age 70½ (they are with traditional retirement accounts).
Seek lower-cost investments. Take a look at the expense ratios on the mutual funds in your retirement account and see if a similar but lower-cost fund is available. "Investment expenses are a drag on returns," says Gilbert. "Everything else being equal, a lower expense-ratio mutual fund is going to outperform a more expensive mutual fund, on average."
Avoid retirement account penalties. Withdrawals from IRAs before age 59½ and 401(k)s before age 55 come with a 10 percent early withdrawal penalty, plus income tax on the amount withdrawn. Once you reach age 70½, you are required to take withdrawals from your traditional retirement accounts. Those who fail to withdraw the correct amount face an even stiffer penalty: a 50 percent tax in additional to regular income tax on the amount that should have been withdrawn.
Estimate your retirement expenses. Set yourself an approximate retirement goal by figuring out how much you spend each year and multiplying that by how long you think you will live after retirement. "If you need $40,000 to $50,000 a year to live on, then you have to resign yourself to the fact that you will probably need $1 million for retirement if you are thinking about retiring over 30 years," says Feldman. "People really have to understand that they have to put away serious money in order to meet their retirement goals."