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How to Avoid a Retirement Savings Shortfall

Retirement Savings Shortfall

We often hear the word “trillions” with regard to the national debt, which is now closing in on $20 trillion, according to the US Debt Clock. But an even more alarming trillion-dollar figure might be the worldwide projected retirement savings shortfall.

According to a new report released by the World Economic Forum, there will be a $400 trillion retirement savings shortfall worldwide by the year 2050 if current retirement savings trends continue. Here in the U.S., the current projected retirement savings shortfall is $4.13 trillion, according to the Employee Benefit Research Institute (EBRI).

Making the Numbers Relatable

Numbers like these are too big for many people to wrap their minds around. So bringing it down to the individual level, the current retirement savings shortfalls for at-risk early baby boomers on the verge of retirement, according to EBRI, are as follows:

  • $71,299 per individual for married households,
  • $93,576 for single men, and
  • $104,821 for single females.

One of the main reasons for these eye-popping retirement shortfall statistics, according to the World Economic Forum report, is the shift by many employers away from offering defined-benefit pension plans. Instead, many are offering employees defined contribution plans that put the onus for retirement savings on employees, rather than employers. These types of plans currently make up more than half of all global retirement assets, states the report.

Not only do defined contribution plans put more retirement saving responsibility on individuals, but they also shift much of the risk for shortfalls to individuals. It hasn’t helped matters that stock and bond returns have trailed historic averages over much of the past decade, according to the World Economic Forum report.

The Role of Qualified Retirement Plans

If you think you might be facing a retirement savings shortfall yourself, we believe one of the best things you can do is make a commitment right now to socking away as much money for retirement as you possibly can in the remaining years before you plan to retire.

The good news is that the federal government is doing its part to try to minimize retirement savings shortfalls by offering generous tax breaks on qualified retirement plans, including the following:

  • Traditional and Roth IRAs — Traditional IRAs offer tax-deferred growth and an immediate tax break for individuals who qualify in the form of a deduction equal to the amount of their annual contribution. Roth IRAs don’t offer a current tax deduction, but contributions grow tax-free, instead of just tax-deferred.

Keep in mind that eligibility for contributing to a Roth IRA phases out above certain adjusted gross income (AGI) limits. In 2017, single individuals with AGI of more than $133,000, or married couples who file jointly with AGI of more than $196,000, cannot contribute to a Roth IRA. The annual traditional and Roth IRA contribution limit in 2017 is $5,500, or $6,500 if you’re 50 years of age or over.

  • Traditional and Roth 401(k)s — The 401(k) is one of the most popular company-sponsored retirement plans in the U.S. With a traditional 401(k), you contribute a percentage of your salary each pay period to your 401(k) account on a “pre-tax” basis, so your earnings grow without the burden of taxation. In addition, your employer may choose to match your 401(k) contributions on a percentage basis.

Meanwhile, Roth 401(k) contributions are made on an “after-tax” basis, so you won’t receive a current tax deduction. However, you can withdraw Roth 401(k) funds income tax-free after you reach age 59½ if you have held the account for five years or longer. In 2017, the elective deferral limit for traditional 401(k) plans is $18,000, or $24,000 if you are age 50 or over. The annual contribution limit for Roth 401(k)s is the same.

  • SIMPLE IRAs and SIMPLE 401(k)s — If you work for a small business with 100 or fewer employees, you might have the option of participating in one of these simplified retirement plans. Your employer will make contributions to your SIMPLE IRA that you can supplement with your own contributions. SIMPLE 401(k)s are similar to SIMPLE IRAs, with a few technical differences.

Contributions you make to a SIMPLE IRA or SIMPLE 401(k) are made on a salary-deferral basis. In 2017, you may contribute up to $12,500 to a SIMPLE IRA or SIMPLE 401(k), or $15,500 if you’re age 50 or over.

Stay Focused on Your Priority

Don’t let mind-numbing statistics like those cited here distract you from what should be your main priority: utilizing a qualified plan like one of these to help you save for a financially secure retirement. Please contact us if you have more questions about saving for retirement.

The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC’s (“Frontier”) investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.