Retirement Planning: How Much Should I Save, And When?

Income tax returns were due April 18 this year — also the deadline to make IRA and many other retirement plan contributions for last year. So naturally, it’s too late to make any last-minute contributions for 2015 … but it’s a fine time to start planning for 2016.

Retirement Planning: Make a Plan for Your ContributionsYou still have the better part of nine months to max out your 401k plan for the year, and nearly 12 months to max out your IRA, Roth IRA, SEP or HSA, among other vehicles. But the sooner you start, the more likely you are to actually meet your goals. What could be a very doable monthly savings goal if started today might be a lot less doable if you wait until the summer.

So with all of this said, let’s map out a game plan for maxing out your contributions.

Where Will Your Contributions Go?

The first step is figure out what your options are. If you work for a company, the government or a non-profit, chances are very good that you have access to a 401k plan, 457b plan or 403b plan. For the vast majority of Americans, these are going to be the best options, and saving for them should be the No. 1 priority. So let’s dig into it.

The maximum salary deferral for all of these employer-provided options is $18,000*, or $24,000 for those 50 and older. For now, let’s just focus on the $18,000.

Let’s say you’ve been remiss and haven’t allocated a single dollar to your 401k plan yet for tax year 2016. You now have a little over eight months — or 16 paychecks — to get to $18,000. So, doing the math, you need to put save $2,250 per month, or $1,125 per paycheck, to max out your contribution for the year.

Now, that might sound like a lot, but it’s doable for most American families earning $80,000 or more. And if maxing out your 401k plan means that you have to dip into your regular savings account for a few months to pay your bills, that might be perfectly fine. It’s definitely worth it to take advantage of the tax savings and employer matching benefits.

In looking at some of the other retirement options, we have a little more timing flexibility, and the numbers get a lot smaller.

The contribution limits for IRAs and Roth IRAs this year are $5,500 for those younger than age 50, and $6,500 if you’re age 50 or older; you have until next April to contribute. Well, $5,500 spread out across 12 months is a very reasonable $458 per month, or less than many car payments these days. My monthly electric bills in Texas are higher than that, at least in the summer months. There is absolutely no justifiable reason why you cannot meet a contribution schedule like this. If you can’t save $458 per month, you need to take a long look in the mirror and an longer look at your monthly credit card statements and figure out what you’re doing wrong.

For the more ambitious savers, HSAs offer nice “spillover” savings options once you’ve already maxed out any employer retirement plans or IRAs that you qualify for. In 2016, you can contribute as much as $6,750 ($7,750 for those 55 and older) to an HSA investment account if you have a high-deductible health plan for your family.

The contributions are ostensibly for health expenses, but no one ever said you have to spend the funds on health expenses today. You can use HSA funds tax- and penalty-free at any time for health-related expenses. But you can also save the funds indefinitely and withdraw them penalty-free for non-health expenses once you reach age 65. (You’d pay taxes, of course, but you’d avoid the 20% penalty for non-health-related withdrawals.)

So, so long as you don’t plan on touching the funds until age 65, an HSA plan can be thought of as an extra, supplemental IRA. You have until the tax deadline to contribute, so maxing out the full $6,750 would amount to $562 per month. This is less of a priority than an IRA or your 401(k) plan. But if you’re an ambitious saver, it certainly makes the cut.

*The maximum for 457b annual contributions is the lesser of either the elective deferral limit (the aforementioned $18,000) or 100% of the participant’s includible compensation.

Check out our full checklist if you haven’t already, or tab back over to the checklist to see other ways you can clean up your portfolio.

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas.

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