Time is running out! 2020 will soon be history. Here is one important item to check on that can improve your long-term financial picture.
Take a good look at your 401k plan or other employer plan. Do you know how many dollars you have contributed in 2020? Plans often ask you to designate a percent of income, but it is important to know if you are maxing out your allowable contribution in dollars. The maximum contribution is $19,500 this year. If you turned 50 in 2020 you can join the ranks of those who make “catch-up contributions” each year. Congress allows an additional $6,500 to be contributed for those 50 and over for a total annual contribution of $26,000.
Many employees only contribute 3% to 5% of pay to their 401k plan. If your contribution level is low, you can set a strategy to gradually make increases. Plan now to increase your contribution by 1% or 2% each year until you get to the maximum. Some plans allow you to schedule annual increases and making it automatic is the best way to make it happen.
When you receive a raise, give yourself a “retirement raise” at the same time by increasing your 401k contribution. That is a relatively painless way to get more into your plan.
There is one rule set in stone, in my opinion, and that is that you should always contribute enough to get the maximum employer match. Does your plan offer a match? Do you know what that formula is? You need to find out before this year ends and make certain you are contributing enough to get all the matching dollars your employer wants to give you. From that level, you can then work on annual increases to make your 401k strong.
If you have any paychecks left this month, make an additional contribution for 2020 before the year ends.
It is also time to prepare for the new year. 2021 contribution limits remain the same as 2020. Most plans allow you to go online and increase your contribution, so do it now and start off with a higher contribution in January.
Depending upon your income a $19,500 contribution could be prohibitive. So, here is a good rule of thumb: contribute 15% to your 401k from every paycheck. Again, use a gradual strategy, if necessary, to reach this goal.
The most important thing you can do for your future is to put your savings and investing on auto pilot. Make automatic contributions from every paycheck. Your employer plan is perfect for an automatic strategy. Your contribution comes out before you see your paycheck, and you will become accustomed to your net pay. It is the most successful way to accumulate wealth. Pay yourself first and set high goals. Your contributions are the most important part of wealth building. The market can help, but your contribution level is the key to building a large retirement account. Your 70 year old self will thank you some day!
If you have questions about how to invest your 401k account, call us. We are here to help you.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.