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As Americans sock away more for retirement, here’s how to catch up

Posted: 20 February 2020 11:26 am
Still life of differently sized white, blue and pink piggy banks in ascending size order on pink background

Row of piggy banks

Even if you started late, there are strategies to help you amass enough savings to comfortably retire.

Americans are saving more for retirement than ever before. According to recently released fourth-quarter 2019 statistics from Fidelity Investments, average 401(k), IRA and 403(b) balances have hit record highs.

The average 401(k) balance is now $112,300 and the average IRA balance is $115,400 — 17% more than in 2018. Additionally, the percentage of investors contributing to an IRA has increased, the number of 401(k)s and IRAs that have balances in the millions have hit record levels and more employees are automatically increasing their 401(k) employees’ contribution rate.

At the same time, 15% of Americans have no retirement savings at all. This 15% is roughly irrelevant of age; according to CNBC, 14% of Gen Xers (age 39 to 54) and 14% of Baby Boomers (age 55 to 73) report having no retirement savings. 17% have between $1 and $774,999 saved, which is far short of the $1 million most experts hold as the target amount needed for retirement.

While a 40-year-old is unlikely to save as much as he/she would have if he/she started at 20-years old, there’s no reason to think one is too old to save for retirement.

With the right strategy, it’s possible to make the best of a bad situation.

Go all-in with your 401(k) and IRA

If you’re fortunate enough to have an employee-sponsored 401(k), you should maximize your employee contribution or, at the least, make the largest contribution you can regularly afford. If you don’t have an employee-sponsored 401(k), establish an IRA and contribute as much as you can afford to it. Aim to assign high-yield savings accounts to your IRA.

IRAs or individual retirement accounts are bank products that hold funds and other assets for retirement. These assets will need to be invested and managed either by the IRA administrator or the investor. This differs from a 401(k), which is typically always managed by a third-party.

The name of the game when catching up is maximizing interest. This means securing a high rate of return. High-yield savings accounts are the fastest passive way to get a high return-on-investment (ROI). Despite this, active investing — while riskier — can yield an even higher ROI. This means investing your IRA funds in an aggressive basket of assets. While creating such a portfolio can be intimidating, there are resources available to make it easier, such as robo-advisors.

There are different types of IRAs, but for catch-up savings, Roth IRAs — which are tax-deferred — are likely the best option. As taxes are paid on the payout and not the contribution, these devices maximize compound interest. There are contribution limits based on income that must be considered. But despite this, a fully funded Roth IRA presents one of the best opportunities to maximize your retirement savings.

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