Do you ever feel like you’re behind before you even get started? Or how about drowning in a sea of information that’s constantly evolving and changing? Unfortunately, that’s how many people feel about their retirement. But retirement planning is just too important to brush aside and hope it works out someday in the future.

According to J.P. Morgan, 74% of Americans are already behind on their retirement planning.(1) Since there is no such thing as “saving too early” or “being too prepared,” there is no time like the present to get on the right track for your retirement -- and it starts with an understanding of the basics to form your optimal investment strategy to maximize your contributions. After all, your strategy may change depending on where you’re at in life, your age or your circumstances. Therefore, getting a baseline understanding of your available options can help you grow your money more efficiently and effectively over the years.

You’ve probably heard several different retirement terms thrown around -- 401K, IRA, Roth, required minimum distribution, plan limit changes and so on -- some you may know, others you may not. Don’t be intimidated, once you get a handle on it, the more confident you will be in your decisions.

To ensure you have a baseline understanding of the available retirement accounts, you can either set up a 401K (through your employer) or an IRA (individual retirement account). In fact, you can set up both! It can be traditional (meaning you put your money into the account pre-tax – which will also lower your taxable income for the year -- but you will pay taxes when you withdraw it) or a Roth (meaning you pay taxes upfront when you put your money into your account, but it’s tax free when you withdraw it). Check out our options.

Simple, right? Next comes the power of compounding interest – which is the interest you earn from your initial investment (or principal), plus the interest you receive on the interest, and so on. The key notion here is the earlier you start saving, the more time you have for your interest to accumulate and grow over time. Here’s an example from Money Under 30:(2)

A 22-year old earning $40,000 who starts putting 10 percent into a 401K and gets a three percent employer-matching contribution could have a nest egg of $1.7 million at age 65. And that’s not accounting for any raises or increased contributions over time. If you wait until you turn 32 to begin saving, however, the same contributions will only grow to about $780k.

So now that you understand what accounts you have available and the importance of putting money in them early for the most growth potential, it is important to note there are maximum limits the IRS allows you to contribute to tax-advantaged accounts. Since these types of accounts reduce your taxable income, the limits are important to be aware of not only to maximize retirement contributions over the long-term, but also to save in taxes and maximize your paycheck in the short-term.

Each year, the IRS will evaluate any cost-of-living adjustments that should be factored into retirement plan contributions. As such, since an increase to the cost of living was announced for 2019, the maximum contribution was also adjusted (notably it was the first time in 6 years for IRAs). Here’s a breakdown of the contribution limit changes that may affect you:(3)

  • The amount you can contribute to a 401K (or similar workplace retirement plan) is $19,000 per year (up from $18,500 in 2018)

    Employers may also offer a match and/or profit sharing contribution. This is typically 2-3% and not included in the $19,000 per year limit you are allowed to contribute (in fact, the maximum amount an employer can contribute is $37,000 to a traditional 401K).

  • The maximum amount you can contribute to an IRA is $6,000 per year (up from $5,500 in 2018). Note, there are eligibility requirements for IRA accounts.

For those 50 or older, there are also “catch-up” contributions, providing even higher limits for those who are closer to retirement. This includes an additional $6,000 for 401K accounts and $1,000 to IRA accounts.

Although these maximum contribution limits may seem high to you now, they may become more realistic sooner than you think. In fact, 13% of employees with retirement plans at work are already saving the maximum amount (in 2017). As your income goes up and your circumstances change, it’s important to keep striving to maximize retirement contributions.

In addition to maximizing contribution limits, the following 5 tips can help keep you on track to reach your retirement goals:

  • Maximize employer contributions – whether through a company match or company profit sharing, learn what benefits your employer offers (plus any other details such as vesting schedules) to understand your options and maximize this benefit.
  • Automate your retirement contribution -- so it comes out of your paycheck before even hitting your bank account. This will reduce any temptation to reallocate that money for something else that may arise.
  • Talk to a professional – there are professionals who have expertise in this space. Leverage their knowledge to ensure you’re set up for retirement success early. Some employers even offer financial advisors or dedicated resources to consult with.
  • Stash extra funds – consider increasing your retirement contribution when you receive a raise or life circumstances change. Even a 1% increase can make a huge difference down the road.
  • Keep up-to-date – revisit your retirement goals and strategies when a life event happens, such as getting married or having a kid. It’s important to ensure your beneficiaries are updated and your future plans accommodate your loved ones.

Don’t leave your future up to chance. Establishing a baseline understanding of retirement accounts, saving early, monitoring your progress and optimizing your strategies can make a world of difference to your future self. After all, retirement planning does require a plan.

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