With pension plans becoming increasingly rare over the years, we are now personally responsible for making sure we are on track for our retirement. There are a variety of retirement accounts such as a 401(k), 403(b), SIMPLE IRA, Roth IRA, etc. to help us. If you have access to an employer-sponsored retirement plan, then ideally you are regularly contributing towards your account. Employer-sponsored plans, such as a 401(k), typically have higher contribution limits than an IRA, and possibly at lower costs. For 2020, the contribution limit for most employer-sponsored plans increased from $19,000 to $19,5001. The catch-up contribution limit for employees aged 50 and over increased from $6,000 to $6,5001. Traditional & Roth IRAs have annual limits of $6,000 with an additional $1,000 if you are age 50 or older1. Another benefit of these types of work-sponsored plans is that your employer may match a percentage of your contribution. An employer match is essentially free money. In other words, if your employer agrees to match up to 3% of your pay, then consider at least contributing that amount to take advantage of the full benefit. If you are unsure how much you are contributing or even if your employer matches, check with your plan administrator or the person responsible for employee benefits to get more information.
If you recently received a pay raise, then you have an additional reason to evaluate your retirement plan contributions. An increase in pay can be an incentive to pump more money into your retirement account, without sacrificing your current standard of living. For example, if your pay was bumped up 5%, consider shifting 2% to 3%+ of the raise to your overall retirement plan contribution. If your plan offers an auto-increase, setting it to increase 1% every year is a strategy that can certainly add up. If your plan does not offer this feature, make a point to setup an annual reminder to make the adjustment manually.
A common question I get asked is whether you should limit your retirement contributions in order to help fund investment accounts for the benefit of your child(ren). Now it depends on personal circumstances, but the general rule of thumb is that you should take care of yourself first before you save for your children. Sure, we want to make sure our kids are financially stable but to play devil’s advocate, do you also want to be a financial burden to them later in life because you neglected your own retirement plan? Our belief is that if/when you can regularly contribute to your retirement account(s) to allow for a comfortable retirement, have sufficient savings for an emergency, and still have money left over, then you can start funneling money towards your children’s future.