Saving for retirement can be intimidating and overwhelming. It can often feel like a huge and unattainable goal. It’s crazy how many 20 and 30 somethings are already panicking about retirement, and the result is that they are saving pretty damn aggressively.
And this year you’re eligible to contribute $500 more to your retirement account than you were last year. But should you?
When clients come to Stash, it’s not uncommon that we run into H.E.N.R.Y.s™ that are over-saving for retirement. Sounds crazy, but the media has made us think that we’re never going to be ready, so tons of us are stashing too much away. And when we save too much for retirement in our 20s and 30s, we sometimes end up sacrificing our other goals that fall between now and those golden sunset years like buying a home, upgrading our lifestyle, traveling, and going back to school.
It turns out that H.E.N.R.Y.s™, like many millenials, are actually over-saving for retirement. Now we’re not saying you shouldn’t be putting any money away for retirement, hell no! You definitely should be saving, but we’re trying to get to the heart of what the sweet spot is for you.
The two most common ways to save for retirement are IRAs and 401(k)s. Here’s a quick explanation of the difference before we jump into the new contribution limits.
IRA, 401(k), What’s the Difference?
IRAs and 401(k)s are both retirement accounts.
A 401(K) IS…
always established by an employer. You can’t set one of these up on your own. This piece isn’t going to get into all the different types of 401(k) plans, but if your employer is offering one, particularly if they’re offering to match your contributions, you should definitely take advantage.
IRA STANDS FOR…
Individual Retirement Account. There are Traditional and Roth IRAs. The big difference here is when you pay taxes on the money. With a Roth, you pay taxes on the money now, and can withdraw without paying taxes on the money in retirement (after you’re 59 ½ years old). A Traditional IRA will require you to pay taxes on the money when you withdraw it in retirement, but your contributions today may help you pay less taxes now.
Taxes and retirement accounts are complicated, we aren’t going to lie. So here’s the very basics of what you need to know this tax season and what changed between 2018 and 2019.
New Contribution Limits
The contribution limit for most 401(k) plans increased by $500 in 2019 from $18,500 to $19,000. The max amount you can now contribute to your employee sponsored 401(k) is now $19,000.
"It’s not uncommon that we run into H.E.N.R.Y.s™ that are over-saving for retirement."
The IRA limit is also going up by $500, from $5,500 to $6,000
But should you be aiming for these limits? Maybe not if your salary is still around $100k or less and you have other big things to save for in the meantime. Many H.E.N.R.Y.s™ and future H.E.N.R.Y.s™ are maxing out their 401(k)s and IRAs when they’re on track for healthy retirements without having to do so. Remember, once you put money into a retirement account, chances are you are going to have to pay a fee if you want to get it out early. If this sounds like you, don’t brush off warnings about over-saving for retirement because you absolutely should not ever, EVER borrow from your 401(k), EVER. Period.
How do you know if this might be you? We have a retirement calculator linked at the end of this article, but…
Here’s a handy hypothetical:
Say you’re 30 years old making $80k/year with at least $25k already stashed in retirement accounts. You’ll hit $1,000,000* at age 65 if you’re contributing 5% to your 401(k)!
THE OTHER GOOD NEWS? THIS DOESN’T TAKE INTO CONSIDERATION…
-That your salary will go up!
-That you may receive social security!!
-That you are probably getting an employer match!!!
-That you may have an SO that’s also contributing to retirement!!!!
To contribute to a Roth IRA for future tax benefits, you need to fall under a certain income threshold. We call it a “use it or lose it” account, because as a H.E.N.R.Y.™ or future H.E.N.R.Y.™, the day will come when you can no longer contribute to this account because you make too much money! #worthit That income threshold also went up this year, a bit. If you’re rocking the single life and filing alone, you can now make up to $122,000 and contribute to a Roth. If you’re filing jointly, the new limit is $193,000. There’s a declining amount you can contribute, if your income falls somewhere in between.
And real quick, let’s clear up a common misconception about retirement contributions, shall we?
Your IRA contributions aren’t always tax deductible. If you and your spouse are both offered 401(k) plans at work, as a H.E.N.R.Y.™, you can’t deduct your IRA contribution (you can only deduct your contribution if your AGI is less than $103,000). If only one of you is eligible for a 401(k) at work, it’s likely you still can’t claim your contribution as a deduction because you’re a high earner – the IRA tax deduction is phased out if the couple’s income is between $193,000 and $203,000 in 2019. See more than you probably care to know here.
Here are more details on how to know if you’re considered covered by a plan at work.
Holy sh*t, that was a lot of numbers. So what do you DO with all of this info? Are these new higher limits a good thing for H.E.N.R.Y.s™? Maybe.
Are you over-saving for retirement?
How do you know if you’re saving enough? How much should you contribute this year? Should you max out your IRA and your 401(k)?
We get it. It’s hard to know what you want your retirement to look like when it’s still so far away. Hell, sometimes it’s hard to know what you want next year to look like, nevermind 30 or more years from now. For now, we suggest you mess around with a retirement calculator, take a guess at how much you might want for retirement. This can help you figure out how much you actually need to be stashing now to get on track for your goal.
If you have no idea where to start when using a retirement calculator, focus on figuring out how much you’d need to save to be able to replace your current annual salary for a 30 or 35 year retirement. Fiddle around with the calculator until it shows what you’d need to save today to be on track for your current salary for 30+ years.
Here’s an example: If you’re 26 years old making $65k/year and you want to retire by the time you’re 60, to replace 70% of your current income for 35 years, you’d need to save about $1k a month from now until you’re 60. Notice this is only $12,000! Which is much less than the new 401(k) limit of $19k!
FYI, the biggest mistake we see people making when it comes to retirement accounts is investing as if you’re already retired. Translation: lot’s of y’all are being way too conservative with your retirement portfolios. If you’ve invested in a diversified portfolio you should be looking at a return of about 8% on average. This doesn’t mean 8% consistently every single year, markets fluctuate, but that when you take the average over several years, it falls around 8%. This means you have to have some moderate, or even aggressive investments mixed in there!
Then remember to check in with this each year as your income gets stronger. But don’t forget the other goals you have along the way! Weddings, trips, continued education, buying a home…these are all important goals. Remember that saving for retirement is only a piece of your financial puzzle.
*assumes long-term historical investment return averages of 8%, which is pretty standard for the market, historically.