People have various reasons on why they prolong saving for retirement and majority can be attributed to the 3 poor savings habit.
As an example, a lot of young people take retirement for granted easily because it is really hard to think what you’re going to do 20 or 30 years from now. They would rather spend their money on something else that they can use for the present.
In most cases, people just do not have enough money to put in while others are just plain undisciplined when it comes to their finances.
However, what ever your reasoning is, you must start saving for your retirement if you have not done it already.
The following are the 3 big reasons on why you should start saving for your retirement!
1. You do not want to rely on social security benefits alone
Will you be retiring in poverty? This is what would happen to you if you rely solely on Social Security benefits when you retire. Most people would not be able to sustain their standard of living by relying on social security alone. That is why it is imperative that you supplement your social security by contributing to other retirement plans such as an individual retirement accounts and employer sponsored retirement plans. In addition, many experts are saying that by the time year 2037 hits, there will be no more left of the social security because more people are drawing against it and the funds are not getting enough contributions from the current workforce.
2. You can take advantage of huge the tax savings every year
- Contributions Are Tax Deductible – In general, the contributions to your retirement plans are tax deductible with the exception of Roth IRA or Roth 401k. This could yield a huge tax savings come tax time. As an example, if you put in $10,000 in your 401k for the year and you are in the 28% tax bracket, you have just saved yourself $2,800 in taxes, meaning more money in your pocket. You can also look at it this way, you can consider the tax savings as return of investment. So in this scenario your retirement fund just earned 28% during the first year. Where can you find a portfolio that can generate you 28% rate of return during the first year!
- Reduces Your AGI – In addition, majority of the retirement contribution are considered above-the-line deductions, which reduces your adjustment gross income (AGI). The article Why you should reduce your AGI if you can will give you the lowdown on why having a lower AGI could result in additional tax savings.
- Qualifies for Saver’s Credit – Saver’s credit only applies to low to moderate income earners. If you qualify, not only that the contributions are tax deductible, they can also be used as a credit! Talk about getting a double tax benefit! You can take up to 20% of your contribution as saver’s credit and this will help reduce your tax liability even more!
- Earnings are tax deferred - Another tax advantage of retirement savings is that the earnings are tax deferred and this feature applies to all the retirement plans including the Roth IRA or Roth 401k. On the article the power of tax deferred accounts, you’ll see the huge impact on how fast your money grows if you invest your money into tax deferred accounts. This is because the earnings that are supposed to be used to pay for your taxes are actually invested back in your retirement funds and these earnings even grow exponentially!!
3. You can take advantage of free money from your employer
Most employers nowadays provide retirement plans as part of the employee benefits. In most cases, companies are providing a matching contribution – meaning, in addition to your own contribution, your employer would also contribute money that matches your contribution up to a specified maximum percent of your salary. This is like getting free money for your retirement.
As an example, let’s say your monthly salary is $10,000 and your company will match your contribution up to a maximum of 5% of your salary. If you put in $500 (5% x $10,000) towards your 401k plan, the company will match it and contribute an additional $500 (5% x $10,000). However, if you contribute $600 (6% x $10,000), you will still only get $500 matching contribution since the match is maxed out at 5%.
Absolutely! I pity those who think Social Security is enough! By the time it’s your turn, SS benefits would be much less than what it is today and the age limit would be much higher.
Social Security could be enough. It depends on how much you earn and how much you spend. If you have no debt going into retirement, your only cost of living will be related to expenses. And, obviously, the higher you expenses the more retirement will cost you.
The big deal is health care costs and if you “retire” before Medicare and you do not have health insurance with a catastrophic limit, your savings are at a huge risk. I just had a procedure for which the hospital billed over $100,000! My annual out-of-pocket limit on my health care insurance is $5,000, however, and I still haven’t reached that.
But like Social Security, the Medicare program is also at risk of going broke. Retirement might soon be as extinct as the Dodo bird!