As Americans deal with high inflation and a potential recession, many are struggling to save for retirement. In fact, more than 40% of the U.S. private sector workforce lacks access to a workplace retirement savings plan, according to a study by T. Rowe Price.
The firm found that many people have trouble prioritizing retirement savings due to other financial priorities such as their mortgage, supporting a child's college fund or helping aging parents. In addition, the current state of the economy is taking a toll on the nest eggs of those who are saving.
"Volatile markets create complex challenges for those investing for, and spending in, retirement," T. Rowe Price said in its report.
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Investing in an IRA
Despite harsh market conditions and a lack of access to workplace retirement plans, there are many ways people can start saving for retirement.
For example, most people can open individual retirement accounts (IRAs) through a bank or investment management firm. A traditional IRA works similarly to a traditional 401(k). Contributions made toward an IRA are tax-deductible and may lower one's tax bill. Saving in a traditional IRA means contributors won’t pay taxes on their savings until they withdraw money at age 59.5. On the other hand, a Roth IRA allows for tax-free withdrawals for those who are at least 59.5 years old and have been contributing to their accounts for at least five years.
For 2023, the total contributions investors can make toward their traditional IRAs and Roth IRAs is $6,500 or $7,500 if they’re at least 50 years old. This is up from the contribution limits of $6,000 or $7,000 for those age 50 or older in 2022.
Investors may also benefit from a saver’s credit based on their contributions. This tax credit can add up to 50%, 20% or 10% of contributions, depending on the person's adjusted gross income.
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How much should you save for retirement?
Most financial experts recommend people invest at least 15% of their income in a tax-advantaged retirement plan each year, according to Fidelity Investments.
But considering immediate financial obligations, many people won’t be able to invest as much. T. Rowe Price recommends people start with what they can as early as possible.
"Our research shows that saving early and consistently can make a big difference in helping workers retire on their own terms," T. Rowe Price said in its report. "Someone facing a savings shortfall at retirement can’t go back and give themselves more time: Once lost, the opportunity to start saving early can never be regained."
But saving early can pay off due to compounding interest. A person who would start saving now for ten years and then stops would have $91,880 in savings after a decade, according to research from Securian Financial. That’s $30,000 more than someone who would have waited 10 years to start and saved for 20 years.
If financial obligations are preventing you from saving as much as you can for retirement, consider refinancing your mortgage to a lower interest rate. Visit Credible to speak with a mortgage refinance expert and learn if this option is right for you.
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