It’s impossible to over-emphasize the importance of stashing away money for retirement – particularly when you’re young.
The longer amount of time your retirement savings have to compound, the larger the kitty you should amass for your golden years.
As you undoubtedly already know, the two main vehicles for retirement savings are Individual Retirement Accounts (IRAs) and 401(k)s.
IRAs and 401(k)s Explained
Individuals set up their own IRAs. Traditional IRAs allow you to put in pre-tax income, and then you pay taxes when you withdraw the money after age 59 ½. With Roth IRAs, you pay tax on the income that you put in the IRA, but you pay no taxes when you take it out.
Whether to opt for a traditional or Roth IRA largely boils down to your current tax rate and what you think it will be when you retire.
A traditional IRA likely makes the most sense if the rate is higher now than you think it will be later. This is because you get the most tax savings that way. But if you expect your tax rate to be higher later than now, you probably want to opt for a Roth IRA.
You can contribute to your IRAs for tax year 2023 until April 15. Contribution limits are $6,500 and $7,500 if you’re 50 or over. For 2024, the limits are $7,000 and $8,000 if you’re 50 and over.
A 401(k) account is established by your employer. You can contribute some of your salary to the 401(k). You contribute pre-tax dollars if it’s a traditional 401(k). And if it’s a Roth 401(k), you contribute after-tax dollars.
For 2024, the limit on your 401(k) contributions is $23,000 and $30,500 for those 50 and older due to catch-up contributions.
Many employers offer to match a portion of your 401(k) contributions. To the extent you can, it makes sense to at least contribute the amount that will draw the maximum match from your employer. That money from your employer is free.
Retirement Savings on the Rise
While numerous studies have shown that many Americans haven’t adequately saved for retirement, some good news has emerged.
For example, the average size of IRAs held at Fidelity Investments totaled $116,600 in the fourth quarter, up 6% from a year earlier and 12% from two years earlier.
For 401(k)s, the average account size was $118,600 in the fourth quarter, up 10% from a year ago and 14% from two years ago.
And more than 37% of workers increased their retirement savings contribution rate in 2023, according to Fidelity.
“This past year ended on a high note for retirement savers,” said Sharon Brovelli, president of workplace investing at Fidelity.
“When it comes to matters like market stability and economic events, 2023 gave us the highs of the highs and the lows of the lows. But encouragingly, many retirement savers took the long view and stayed the course through it all.”
The S&P 500 jumped 24% last year, so there were a lot more highs than lows. That means retirement funds heavy in stocks naturally ascended.
In any case, the bull market helped mint many millionaires. The number of 401(k) accounts at Fidelity with more than $1 million totaled 422,000 in the fourth quarter, up 41% from a year earlier.
Fidelity IRA accounts with more than $1 million hit 391,600 in the fourth quarter, up 40% from a year ago.
Recall that the S&P 500 dropped 19% in 2022, pushing down retirement accounts in 2022 and inflating the 2023 comparisons.
Still, the more millionaires in retirement, the better.