How to Move Your Retirement Savings into High Gear

by Kevin Mercadante

A lot of people aren’t nearly where they need to be when it comes to retirement savings. We all want a comfortable retirement when the time comes, but that will take money that we should be putting away now.

Sometimes life gets in the way of our best intentions, and that’s a big reason why the retirement cupboard is looking a bit bare. But it’s what we do to make things right that really matters, and with retirement savings there’s always a way to make that happen.

A lot of people have drained their plans due to job losses

How to increase retirement savingsIn the past few years, since the start of the financial meltdown, millions of people have not only lost their jobs, but also experienced prolonged periods of unemployment. A 12 month stint without out a job not only means no retirement contributions, but it can also force you to withdraw funds in order to survive.

There can be other reasons why your retirement savings aren’t what they need to be. You may have started saving a bit late in life, or your income may have been a bit on the lean side early in your career. Some people find that retirement contributions are limited by the arrival of children.

If you have any of those factors in your background, you may have some lost retirement contributions to make up for.

There are ways to make it happen.

Moving your retirement savings into high gear

Some people are able put away a comfortable amount of money for retirement each and every year from college graduation through retirement. For others, the road to retirement isn’t quite as straight. There may be times when either expenses were unusually high or income was unusually low.

It may help to know that many retirees who are enjoying a comfortable retirement now did less of the slow, steady kind of saving, and more of the sudden, heavy accumulation variety. You may be able to do the same.

You can start an individual retirement arrangement (IRA), either a Roth or traditional one, as a way to save additional money. Or you can save money in accounts that aren’t tax sheltered but will still give you the assets you need for the retirement you want to have.

Generally speaking though, the most efficient way to accelerate your retirement savings is through a 401K plan. It has the most generous contribution limits for most people and can be extremely flexible.

Maximum 401K contribution for 2013

401K contribution limits have increased for 2013 as they have for most other self-directed and company sponsored plans.

For 2012 the maximum employee 401K contribution is $17,000, however for 2013 it will be rising to $17,500. The “catch-up provision”, allowing people 50 and older to make up for lost time, remains the same at $5,500. But in combination with the regular contribution maximum of $17,500, that will enable someone 50 or older to contribute up to $23,000 per year.

Imagine if you could do that for just a few years?

If you’re 35 years old and you have, say $40,000 saved for retirement, accelerating your contributions to $17,500 per year for just five years, would bring your savings to $127,500—plus investment earnings—by the time you turn 40. That would get you well on your way.

Talk to your employer about maxing out your 401K contributions

Most employees set a percentage contribution that works with their budgets. Often, it’s set when they’re hired and not increased afterward. Many even set the limit at the level that maxes out the company’s matching contribution. You may have set your contribution to 6% of pay simply because the company will match 50% up 6%, and not for any other reason. Or you may have set the limit to 10% just because that didn’t interfere with your lifestyle way back when.

However you arrived at your current 401K contribution rate, it may be time to review your original decision. You may be missing out on substantial additional contributions—and an earlier and/or more lucrative retirement.

While the IRS sets dollar limits on 401K contributions, there is no limit on the percentage of your income you can contribute. In theory, you can contribute 100% of your income up to the contribution limits of $17,500 and $23,000 for 50 and over.

Employers however typically do establish percentage contribution limits. However these limits may be more generous than you’re aware.

Talk to the benefits department at your employer and see just how high a percentage their plan will allow you to contribute. If you’re currently contributing 10% of your pay, but the company will allow you to go as high as 20%, you can literally double your contributions over night.

That would get you back on the retirement savings fast track in no time.

Do you know what the percentage contribution limit is for your company’s 401K plan?

Published or updated November 12, 2012.
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