Retirement Planning: Most People Are Missing Out on a Helpful Tool

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Retirement planning is inherently difficult for Americans. More than half of Americans live paycheck to paycheck, making it hard to find “extra” money to sock away. It can also be mentally tough for many to deny current consumption in favor of long-term savings that may not be accessible for 30 years or more.

This is why it’s so important to take advantage of whatever tools you can to get you to save and invest in the most efficient manner possible. An IRA is one of the best retirement savings tools investors can take advantage of, but data from the Survey of Income and Program Participation by the U.S. Census Bureau shows only 18% of Americans use one. What does this statistic mean for retirement savers, and does it tell the whole picture? Read on to learn more.

What Are the Pros and Cons of IRAs?

Taxpayers not covered by a retirement plan at work can usually get a tax deduction for their contributions to a traditional IRA. For 2023, contributions are limited to $6,500, or $7,500 for those 50 and older. Both contributions and earnings grow tax-deferred until withdrawn, at which point they become fully taxable. However, the tax deduction and the tax deferral generally make IRAs a better overall option than an ordinary, taxable investment account.

The biggest drawback to an IRA is that with few exceptions, you can’t withdraw your money from an IRA until you turn 59 ½ without paying both taxes and a 10% early distribution penalty. However, this can actually work to your advantage. As it’s difficult — and costly — to take your money out of an IRA, you’re more likely to keep it invested for the long run.

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Given the advantages, it’s surprising that only 18% of Americans are taking advantage of this great retirement planning tool. But there may be more going on behind that headline number.

Are Americans Using Other Types of Retirement Plans Instead?

The 82% of Americans that aren’t using an IRA aren’t simply abandoning their retirement savings. Although some are, the truth is that most Americans prefer using a 401(k) plan instead when they have access to one.

According to the Census Bureau survey, 34.6% of Americans are actually using a 401(k) plan. As you can’t make tax-deductible contributions to an IRA if you are covered by a 401(k) plan, this may help explain the low 18% participation rate in IRAs. Of note, according to the survey, 13.6% of Americans also reported that they participate in a defined benefit or cash balance plan.

What Is the Current State of Retirement Savings in America?

The good news is that when taken all together, Americans have a decent participation rate when it comes to retirement savings plans. However, this shouldn’t obscure the fact that when it comes to actual plan balances, Americans in aggregate are still falling short.

A 2023 Gallup poll, for example, shows that only 43% of non-retired adults anticipate being financially comfortable after they retire. The same poll shows that 71% of non-retired adults are at least moderately worried about their finances in retirement, while 42% are “very worried.”

With the average Social Security retirement benefit at just $1,840.27, those looking to live off more than $22,000 per year will need some type of nest egg to help fund their retirement.

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What’s a Good Way To Get Started?

The first step in developing a retirement planning strategy is to dedicate yourself to a lifelong pattern of consistent savings. Regardless of where the money goes, get in the habit of setting aside 10% to 20% of your paycheck towards your investments before you use that money to pay for anything else, even your bills. Then, learn to live off the remainder of your paycheck every month.

Choosing where that money goes is the next important step. If you can participate in an employer-sponsored 401(k) plan, that is often your best bet. In addition to contributing pre-tax money to your account, your employer will likely match a certain percentage of what you put in, which essentially amounts to free money. If you’re not covered by a plan at work, an IRA is likely your next-best option. You’ll benefit from the same tax advantages and may even have more investment options, but you won’t be entitled to any type of employer match.

Regardless of how you do it, the bottom line is that saving and investing — as much as you can, as often as you can, as early as you can — is the cornerstone of building a significant retirement nest egg. But don’t overlook the powerful tools you may have access to, such as an IRA or 401(k) plan, to help you reach your goals.

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