saving more

In a recent post, I pointed out that none of us appear to be contributing enough to our 401k plan accounts to fund a retirement that doesn’t require reducing our standard of living.

Many of us, when faced with that reality, struggle with how we could possibly be saving more. Following are some thoughts on how you can meaningfully begin saving more today for your retirement.

1. Increase your 401k contribution percentage whenever you get a raise

This is the simplest and most effective way to begin saving more. If you receive a 4% raise, for example, increase your 401(k) plan contribution percentage by 2%.

Most of us have difficulty with the concept of saving more because we can’t imagine having a smaller paycheck to live on. This approach guarantees that you will begin saving more and end up with a larger paycheck. Every one of us should practice this saving habit every time we get a raise.

2. Capture all the employer match

Studies show that at least 20% of 401k plan participants are not contributing enough to receive all of the matching contribution dollars their employer is willing to give them.

Do you know what the risk-free return is on a 100% matching contribution from your employer? Yep, this is simple math, 100%. Risk-free. There is no better investment these participants can make than capturing additional employer matching dollars.

Research also indicates that the majority of these participants are within 1% to 2% of receiving their employer’s full match. In other words, if they raise their contribution percentages by 1% each time they get a raise over the next two years, they will begin collecting the full match.

Are you receiving the maximum employer matching contributions you are entitled to? Here’s a quick test. If you can’t recall your company’s matching contribution formula (e.g., 50% of the first 6% of employee contributions), you might not be. Check with your benefits department to find out the current match and verify how much you are contributing.

3. Contribute at a higher rate from a bonus

Most employers will allow you to adjust your 401k contribution percentage to contribute at a higher rate from bonus pay. Don’t worry, you can go back down to your former rate the next pay period.

Since most 401k plans now permit contribution rates of up to 80% (or higher), don’t be afraid to contribute a large portion (20%, 30% or more) of your bonus check to your 401k plan account.

4. Fully fund your HSA account

If your employer offers a High-Deductible Health Plan (HDHP), you likely also have access to a Health Savings Account (HSA). These are amazing accounts for a number of reasons.

First, they are triple tax-free. Not tax-advantaged — tax-free. When you make payroll contributions into these accounts, no federal, state, Social Security or Medicare taxes are withheld. Balances in HSAs accumulate tax-free, and no taxes are deducted from distributions when they are used to pay qualified expenses.

But wait, there is more.

If you don’t use up your entire HSA balance in a year, any remaining dollars are rolled forward into the new year. Balances are not forfeited as they are in flexible spending accounts.

Not done yet.

You can accumulate and roll forward these balances into your retirement and use them to pay health care expenses. They can pay for prescription drugs, medical premiums, COBRA insurance premiums, dental expenses, Medicare premiums, long-term care insurance premiums and, of course, any co-pays, deductibles and co-insurance amounts.

The most tax-efficient way to fund retirement health care expenses is via an HSA. It is unfortunate that contribution limits are not higher.

5. Make IRA contributions

If you are contributing the maximum amount to your employer’s 401k plan, or if you have a spouse who does not have access to an employer retirement plan, think about making contributions to an Individual Retirement Account (IRA).

With at least one-third of the American workforce now gig economy employees who don’t have access to employer-provided benefits (gig economy workers are expected to grow to 43% of the U.S. workforce by 2020), this retirement savings strategy is likely to increase in popularity.

If you cannot make deductible contributions into a traditional IRA because you don’t meet the eligibility criteria, investigate making Roth IRA contributions instead.

6. Make catch-up contributions

If you are 50 or older, you can contribute up to an additional $6,000 in 2018 above the IRS 401k contribution limit of $18,500.

For those of us who are panicking now that we can see retirement will become a reality soon, this is a way to try to make up for those years when we didn’t contribute enough.

7. Saving more using the Saver’s Credit

The Saver’s Credit is designed to motivate low- and middle-income workers to save for their retirements. The credit can be worth up to $1,000 in 2018 and comes in the form of a tax credit when you file your taxes.

To receive the credit, you need to make contributions to a retirement plan or IRA during the year. Income limitations apply. This is another retirement strategy that gig workers should evaluate. Contributions to both traditional and Roth IRA accounts qualify.

Most of us can take advantage of at least one of these strategies right now. I hope one works for you.


About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly $475 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or or visit the firm’s website at Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.