Evaluating Your Year-End & Retirement Savings and Making Adjustments for the New Year
Brought to you by Your Money Line
It is important to prioritize saving for the future, especially if you are not yet ready for retirement. There are also a number of benefits to saving into a retirement account specifically (including employer-sponsored retirement accounts or individual retirement accounts). As the year comes to a close, now might be a great time to evaluate your year-end savings. There are two main options: retirement savings or general savings. Both have their benefits and drawbacks that should be evaluated before making a decision.
One advantage of retirement savings is the available tax breaks. Contributions can be made pre-tax, which lowers your taxable income for the year, and earnings on the account are typically tax-deferred. This can be a big advantage, especially if you are in a high tax bracket. Another advantage of retirement savings is that the money is usually invested, which can lead to higher earnings over time. At the very least, this serves as a time to evaluate your contribution percentage. A great goal is to increase your retirement contribution percentage by at least 1% per year. This challenges you to push yourself and prevent lifestyle creep. As individuals earn more money, there is a tendency to incrementally spend more on discretionary items and non-essential comforts. This can lead to an expansion of one's lifestyle, often without a corresponding increase in savings or investments. Lifestyle creep can impact long-term financial goals and stability, as individuals may find themselves saving less and allocating a larger portion of their income to higher expenses, making it challenging to maintain a sustainable financial plan.
If you’re on track for retirement, have an emergency fund, and have short-term financial goals (within the next 5 years), you should put money into a high-yield savings account, like a Benefit Accumulation Account. You will also be able to access your money as needed without penalty by putting it into a savings account rather than your retirement account.
So much of finances is mental. One way to frame savings is by considering it a gift to yourself. If you prioritize savings, it’s a gift to your future self. Just as you set aside money every paycheck for retirement, take this time to set up recurring contributions to your savings account. You can even reward yourself when you accomplish a goal by adding a small sum of money to your savings to look out for your future self. Saving early on in life and making it a habit will set you up for a better future. We know that the possibility for retirement savings or general savings will differ from person to person. Our encouragement to you is to save what you can, when you can.
Gifts by generous donors to Ministerial Relief and Assistance (MRA) make programs like Your Money Line possible. Learn more about MRA here.