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Updated on Wednesday, January 7, 2015
If reassessing what’s going on with your retirement accounts isn’t on your New Year’s Resolutions list, perhaps it should be. In fact, the Center for Retirement Research at Boston College found that more than half of all American households will not have enough retirement income to maintain their living standards after retirement, even if they work until 65 — a full two years longer than the average retirement age.
So what can you do? Here are a few simple steps to start.
First: Run your retirement numbers again
If you’ve been saving blindly for the last couple of years without a plan, now’s the time to bust out the calculator and actually run some numbers. Your first step should be figuring out how much money you need to live your current lifestyle comfortably. Remember you won’t be saving for retirement once you retire, so you can deduct that amount, but you will need to factor in expenses for health care and/or long-term care options, which will be important as you age. Experts recommend that people plan to replace at least 85% of their income in retirement, so that’s one way to start planning the numbers, as well. You can also use a retirement calculator (like this one from AARP) to run the numbers and get a plan.
Second: Check in on your 401(k)
If the last time you looked at your work 401(k) was the day you signed up for it, it’s probably time to check back in. The three main things you’ll need to verify include:
- You’re contributing enough to collect any sort of match your company provides. Whether it’s a full match or a percentage, not making the most of that work perk is literally walking away from money.
- Are you contributing as much now as you could be? If you signed up for your 401(k) when you started as an assistant at the company and you’ve worked your way up the ladder a couple times since, you can probably afford to increase the percentage of your paycheck that you put away.
- Do you have an old 401(k) hanging out at a previous job you left years ago that’s sitting around gathering dust? It may be better to roll that old account over into an IRA.
Third: Consider opening a secondary account
If you’re already maxing your 401(k) out to reach all the match benefits your employer offers, consider opening a secondary retirement account. There are generally income and contribution limits for additional accounts, but most come with tax incentives, as well. The common ones are:
- A Roth IRA: For 2016, married couples filing jointly must make less than $184,000 combined to contribute up to the limit ($5,500 annually across all IRA accounts, or $6,500 if you’re 50 or older). Single people must make less than $117,000 to do the same. (Click here for a full list of contribution limits based on income and filing status.) If you meet the criteria, qualified distributions of Roth savings will be tax-free after 59 ½ years of age.
- A Traditional IRA: While contribution limits are equal to that of a Roth ($5,500 in 2016 across all IRA accounts, $6,500 if you’re 50 or older), there are no income restrictions on this type of account, and the money will grow tax-deferred, meaning you won’t pay taxes on it now, but you will once you start taking it out. You also must begin making deductions from your Traditional IRA once you hit 70 ½, whereas with Roth IRAs, distributions are not required at any specific age.
Revisiting your retirement numbers isn’t about stressing you out. It’s about assessing your current plan and figuring out a way to get to where you need to be in retirement to keep you safe, healthy and happy.
Now wouldn’t that help you feel better?