Before you start your happy new year, it's important to wrap up your tasks for the old one -- especially when it comes to your retirement savings plan. This is your last chance to make 2017 a good year for your future retirement. By taking these steps you can not only ensure you're on track for retirement, but also cut your tax bill for the year.
Add up your 2017 contributions
At least a week or two before the end of the year, add up your retirement contributions for 2017 and see how your contributions compare to your IRA or 401(k) annual limits. If you have an IRA rather than a 401(k), you'd be advised to max out your contributions. That's because IRA contribution limits are much lower than 401(k) limits ; for 2017, the most you can contribute to your IRAs is $5,500 (or $6,500 if you're 50 or older). Since workers need to save at least 10% of their income for retirement -- and 15% is better -- $5,500 is a pretty low bar for the year.
If you haven't managed to hit that 10% to 15% in contributions this year, you still have time. You can make 2017 contributions to your retirement savings accounts right up till April 15 of the next year, although waiting that long to catch up can hurt you by reducing how much you can afford to contribute in 2018. Still, it's better than missing out on contributions for the current year.
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Compare your contributions to your plan
Were you able to contribute as much to your retirement accounts as you'd planned? If not, you need to figure out what went wrong and how to fix it so that you don't have this problem next year. Did you have some unexpected expenses that drained your income? Did you find that you simply didn't have enough money to contribute as much as you wanted? Or did you just never get around to making the transfers?
If emergencies are drawing the money away from your retirement savings accounts, consider setting up an emergency savings fund to help you pay for unexpected expenses in ways that don't drain your retirement funds. "Paying yourself first" by transferring the money to your retirement savings account as soon as your paycheck arrives can keep that money from disappearing into the daily grind of expenses. And setting up an automatic transfer into your IRA will prevent future procrastination.
Review your retirement plan
Next, take a look at your retirement account balances and see how they compare to where you want to be. A retirement calculator can help by taking your current balances and determining how much you're likely to have in those accounts by the time you retire. If the result of this calculation doesn't make you happy, now is a great time to rethink your retirement savings plan and set a new contribution goal for next year.
If you're not sure how much you need to have saved up by the time you retire, then add up your current monthly expenses, subtract anything that you will no longer be paying once you retire, and add any new expenses that are likely to arise (a calculator can help with this process, too). The result is a rough estimate of the minimum income you'll need in retirement -- add 10% to that number to give yourself some margin for error and you'll have a pretty good idea of how much money you'll need. For example, if you end up with a total of $4,000 in retirement expenses per month, then add 10% of $4,000 (which is $400) for a total of $4,400 per month that you'll need in income. Finally, take the total amount that you'll have saved by retirement from the retirement calculator and multiply that number by 4%. That's a reasonable guess for how much you can safely take from your accounts each year once you retire. In other words, if the retirement calculator tells you you'll have $600,000 saved by your planned retirement date, you can assume that you'll be able to safely withdraw $24,000 per year from your accounts. If that number is not enough to meet your needs, you'll need to amp up your contributions.
Review your account set up
While you're busily pulling up your account balances, consider the accounts themselves. Are you happy with your IRA provider ? Many discount brokers will provide you an IRA at no cost, and some will even waive the commissions on certain transactions -- so if you're paying through the nose for the privilege of having an IRA, it's time to start shopping around.
Taxes are another important consideration in setting up your retirement savings accounts. Traditional IRAs and 401(k)s give you a tax break up front by allowing you to deduct your contributions, while Roth accounts give you a tax break at the other end of the transaction (the money you withdraw from these accounts is tax-free). Having both a traditional and a Roth account is the best set up for most savers, since it gives you ultimate flexibility in when and how much you're taxed on your retirement money. So if all you have is a traditional tax-deferred retirement account, consider opening a Roth before the end of the year and diverting some of your future contributions to this account.
Once you've completed all these tasks, you'll be able to sit back, relax, and enjoy the holidays knowing that your retirement savings plan is putting you on the path to a happy -- and wealthy -- retirement.
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