2015 may be underway, but don’t close the door on 2014 just yet, especially if you haven’t reached the contribution limits on your retirement savings accounts.
I bring this up each new year because it bears repeating that tax-deferred 401k, 403b and IRA accounts are unmatched when it comes to saving for retirement, especially for those who regularly add to their accounts through the markets’ ups and downs.
While there will always be a lot of debate around different retirement spending strategies, I don’t think there’s much to argue about when it comes to saving. One of the best ways to ensure you can live the lifestyle you desire in retirement is to save long and hard, well before you get there.
How much is enough? Well, that’s going to depend on your individual situation. Fidelity offers a guideline for retirement savings that suggests you need to have put away eight times your annual income by the time you hit age 67 to have a shot at 85% of your pre-retirement annual income available to you after you retire.
While I can’t vouch for Fidelity’s math, I do agree with the underlying message: When it comes to your retirement, the more you can save, the better.
Savings Limits Stalled
According to many who viewed the Federal Reserve’s bond-purchasing program (also known as quantitative easing) skeptically, all that buying was supposed to lead to inflation, if not hyper-inflation. It has not. So far, inflation remains tepid.
In fact, inflation has remained so low that it hasn’t triggered much in the way of increases in retirement savings contribution limits. With a $500 boost, investors will be able to save up to $18,000 in 401k, 403b and 457 plans in 2015. IRA and SIMPLE plan account holders can sock away $5,500 and $12,500, respectively.
These levels, established by the Pension Protection Act of 2006, are a huge improvement over what they were earlier this decade. The pre-2002 limit was set at $2,000 a year for IRAs, $6,500 a year for SIMPLE plans and $10,500 a year for 401k, 403b and 457 plans. I like the higher amounts, and you should, too.
As you know, I’m a big believer in retirement savings plans, contributing the maximum to my own 401k as well as my IRA (which I converted to a Roth in 2010) every year. In fact, when I can, I add my 401k money early in the year on the assumption that markets rise more often than they fall, hence my desire to buy early, and at the lowest possible price.
As if the opportunity to save your hard-earned dollars for retirement, tax-deferred, wasn’t good enough news, the fact that folks like me, age 50 and older, can save additional dollars is an added bonus. For those of us past the half-century mark, we can once again contribute an extra $1,000 to our IRAs in 2015, for a total of $6,500, and the numbers are even higher for other retirement plans.
If you are over 50 or are turning 50 in 2015, take advantage of the option. And if you didn’t do so in 2014, you still have until April 15, 2015 to make the most of this fantastic feature. (In 2014, the limit was the same, $5,500 plus an additional $1,000 catch-up.)
In fact, if you don’t think you’ll have the full amount available to contribute for 2015 right away, make sure you take advantage of the maximum 2014 contribution limit first, before adding money for 2015. This way you won’t lose the option should a sudden spot of financial fortune give you additional money which can then be contributed to your tax-deferred account later in the year.
If you’re newly eligible for the catch-up contributions, talk to your company’s Human Resources or employee benefits department about your in-house retirement account and make sure that they’ll accommodate you. While employers are not required to allow the catch-up contributions, most should be with the program by now.
Regardless of your age or income level, you should strongly consider making your 2015 contributions now, rather than later. And if you still haven’t done all you can for 2014, do that first. Retirement accounts are great long-term savings and investment vehicles, and regular contributions, when properly invested, will really add up over time.
Senior Editor Dan Wiener and Editor/Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.