Celebrate retirement plan appreciation day
It’s not really a holiday, but maybe you should take a few minutes to appreciate just how great a benefit your retirement plan really is. The following list might just make you feel like celebrating.
Your plan is convenient
It’s simple and convenient—sign up and contribute. The money you contribute to your plan account is deducted automatically from your pay and invested according to your instructions.
It offers pretax savings
The money you contribute is deducted from your pay before federal income (and, possibly, state and local) taxes are taken out. When taxes are deferred on a portion of your income, your tax liability for the year decreases. You end up with more spendable pay than you would if you saved the same amount in a taxable investment account.
Tax deferral is a big plus
You won’t owe income taxes on what you contribute until you start receiving money from your plan when you retire. In addition, any income your plan contributions earn is also tax deferred. Your contributions and earnings will compound over time. Over time, compounding has the potential to impact your plan account balance positively.
The saver’s tax credit helps
If you qualify, you may be eligible to claim the “Saver’s Credit” on your federal income tax return for contributions to your retirement plan. The Saver’s Credit is 10%, 20% or 50% of a maximum of USD 2,000 (USD 4,000 if married filing jointly) in qualified retirement savings contributions for the year. Eligibility and the applicable credit rate depend on your income and filing status.
Celebrate with confidence
Your retirement plan means you won’t have to rely only on Social Security to pay living expenses when you retire. That knowledge is invaluable.
Spending vs. Investing
Consider what might happen if you didn’t spend money on the items below but instead invested that money in your plan account.
If you don’t buy a: | You could have this much after: | ||||||||
| 10 years | 20 years | 30 years | 40 years | |||||
USD 100 Brand-name sunglasses | USD 181.94 | USD 331.02 | USD 602.26 | USD 1,095.75 | |||||
USD 200 Concert ticket | USD 363.88 | USD 662.04 | USD 1,204.52 | USD 2,191.49 | |||||
USD 300 Smartwatch | USD 545.82 | USD 993.06 | USD 1,806.77 | USD 3,287.24 |
Your emergency fund can be a financial lifeline in times of crisis
Would you be able to handle a financial emergency, such as a job loss or a major illness? How about a large, unanticipated expense, such as a major auto repair or a leaking roof? Would you need to borrow from your credit card or take a loan from your retirement plan to pay for such a surprise expense?
Many financial professionals suggest that a better option would be to build and maintain an emergency fund for unanticipated expenses. Here’s what you need to know about how up an emergency fund.
Set a goal
Your emergency fund should have at least three to six months’ worth of living expenses on hand. While that may seem impossible to do, you can start small at first. Put the money into a savings account or another cash account that gives you quick access to it if needed.
Think about adding some or all of any bonus, pay increase or tax refund you may receive to your emergency fund. Once you hit your savings goal, you have to very be disciplined about not spending that money on gifts, vacations or otherwise upgrading your lifestyle. Focus on the fact that this money shouldn’t be used for anything other than a true financial crisis.