Make the most of retirement: Maximize your contributions
By contributing to a retirement plan, you’re already on the path to help secure your financial future. But could you be saving more? Making the most of your organization’s retirement plan now could help ensure your golden years are even brighter.
Review your plan for retirement at least annually
Job changes, marriage, divorce, a new baby—a lot can happen in the span of a year. That’s why it’s a good idea to take a look at your plan for retirement (either on your own or with an advisor) at least annually or as significant events occur.
See if you could save a little more
Think about all the little (non-essential) things you pay for every day. Maybe it’s a morning latte, or lunches out.
Cutting or reducing these expenses could allow you to increase your contribution. Raising your contribution just 1% will only make a small difference in your paycheck—but may make a big difference down the road.
Consider this example for a $35,000 annual income:
Think about increasing your percentage until you’re saving 10% of your eligible pay. Ready to make a change now? Log in to your account to increase your contribution.
Don’t forget about inflation
You might feel like you’re saving plenty to continue the lifestyle you live today in retirement. But even though your income may increase, typically so will your cost of living. For instance, in 1980, a gallon of milk cost $1.60.1 Today, it costs $3.98.2
If you’re 50 or older, consider catch-up contributions3
Sometimes life makes it difficult to save as much as we want. Fortunately, catch-up contributions can help you close the gap.
In 2019, anyone enrolled in their employer’s retirement plan and still working can generally make a maximum annual contribution of $19,000.4 But, if you’re 50 or older, you can contribute an additional $6,0003 after you’ve reached the annual maximum. And since these contributions are typically pre-tax, they’ll lower your current taxable income even more.
Also, remember to take a look at how you’re investing under the plan. As you get closer to retirement, it’s generally a good idea to invest in traditionally less risky, more stable investment options.
This example is for illustrative purposes only. It assumes $35,000 in annual income, 3.5 percent annual wage growth, 30 years to retirement, 7 percent annual rate of return and a 25 percent tax bracket. Estimated monthly retirement income calculations assume a 4.5 percent annual withdrawal in retirement. The assumed rate of return is hypothetical and does not guarantee any future returns nor represent the return of any particular investment option. Reduced take-home pay is accurate for the initial year and would change based on participant’s annual pay. Estimated savings amounts shown do not reflect the impact of taxes on pre-tax distributions. Individual taxpayer circumstances may vary.
Based on analysis conducted by the Principal Financial Group®, October 2015. The estimate assumes a 40-year span of accumulating savings and the following facts: retirement at age 65; a combined individual and plan sponsor contribution of 12 percent; Social Security providing 40 percent replacement of income; 7 percent annual market returns; 2.5 percent annual inflation; and 3.5 percent annual wage growth over 40 years in the workforce. This estimate is based on a goal of replacing about 85 percent of salary. The assumed rate of return for the analysis is hypothetical and does not guarantee any future returns nor represent the return of any particular investment. Contributions do not take into account the impact of taxes on pre-tax distributions. Individual results will vary. Participants should regularly review their savings progress and post-retirement needs.
3 Some plans may not allow catch-up contributions to the plan.
4 Contributions are limited to the lesser of the annual plan or the IRS limit as indexed.
This document is intended to be educational in nature and is not intended to be taken as a recommendation.
Investing involves risk, including possible loss of principal.
Asset allocation and diversification do not ensure a profit or protect against a loss.
Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options.
Insurance products and plan administrative services provided through Principal Life Insurance Co., a member of the Principal Financial Group®, Des Moines, IA 50392.
Principal, Principal and symbol design and Principal Financial group are trademarks and service marks of Principal Financial Services, Inc, a member of the Principal Financial Group.