April 1, 2013
|Judith Ward, CFP®, is a senior financial planner and vice president of T. Rowe Price Investment Services.|
Although investors are as different as investments themselves, research shows that a large majority share a common goal—and cite saving for a more comfortable retirement as their #1 priority.
While there are many ways to save for retirement, two of the best ways to help reach your objective are to participate in a workplace savings plan and complement that plan with an IRA.
As a recent T. Rowe Price study showed, about 9 in 10 workers surveyed with access to a 401(k) plan contribute to it. That's the good news. However, two-thirds of those surveyed save less than 10% of their salary, and about one-third were unsure of how much they contribute. Merely participating is not going to get you where you want to go.
Standard industry practice recommends an annual contribution rate of at least 15%. While this may seem high to some, bear in mind that it includes any employer matching contribution as well. If you can't reach the full 15% immediately, increase it gradually—starting now.
The amount you save will have the greatest potential impact on your standard of living in retirement. And, unlike market and investment performance, you have complete control over your contribution amounts.
If you haven't thought about opening an IRA, think again. Just as with a company plan, an IRA offers tax-deferred growth benefits. However, an IRA usually offers access to a wider range of investment options than an employer-sponsored plan, and you have the option of taking penalty-free withdrawals before age 59½ under certain circumstances.
Results will vary for other periods. Past performance cannot guarantee future results. All funds are subject to market risk, including possible loss of principal.
You may also have the option of opening a Traditional or Roth IRA.
Contribution limits are driven by the amount of income you earn and vary by age. For example, if you are under 50 for contribution year 2012, you can contribute up to $5,000 of earned income. The news is even better for those who turned 50 or older in that same time frame, because their contribution limit is $6,000, up to April 15, 2013.
If you'd like to get an early start on your 2013 contribution, the limits rise to $5,500 and $6,500, respectively.
The Amazing IRA can help you determine which option is best suited to your goals.
However you decide to save for retirement, the earlier you start, the more likely you'll be able to accumulate the assets you'll need to support a more comfortable retirement lifestyle.
You may also want to consider directing any additional funds—such as a raise or bonus—straight to your retirement savings, either as a lump sum into an IRA or by increasing your contribution rate to a workplace plan.
In addition, check to see if your employer's retirement plan provides an option to sign up for automatic increases to the percentage you contribute. If so, consider setting your contribution rate to increase by two percentage points each year until you reach 15% or greater. This way, you will be able to save more for retirement without making your efforts feel like too much of a hardship.