I’m a financial planner so saving is something I can get obsessed with.  I love the end of the year because I do tax planning for myself to figure out what my taxes will look like and I play with different scenarios for how much to put in my solo 401k.  I’m a geek like that. 

Since I’m self-employed, the “solo 401k” plan allows me to put the most in each year compared with every other option out there, (SEP, IRA, etc.). In 2019, the limit (if you make enough) is $56,000 that can be socked away tax free!   The IRS recently announced that the limit for 2020 is $57,000.

This little financial planner’s heart sings when I get to figure out ways of saving more in a tax-efficient way.  I also love focusing on my future self (and her eventual retirement) as a form of self care and wellness. 

Coming Up With The Funds Takes Panning 

However, it’s pretty much impossible to come up with $50k+ if you haven’t started thinking about this until now.   I spend time planning out cash flows (not just at the end of the year, but throughout) because I love numbers and I have a good sense for how taxes work. 

If you’ve read my previous piece about what it takes to be successful setting up a plan to retire early, you know retirement is expensive.  And it’s not something you can borrow for. Putting off saving for retirement means that you’ll have to work harder later to save up enough. “Enough” depends entirely on your goals, where you live, what the costs look like, and your target retirement age.  

Other Ways To Save

If you’re not self-employed you have several other ways to boost your retirement savings starting today: 

  • Make sure you max out your employer sponsored 401k or 403b (OR perhaps you’re offered another one of several other alphabet soup named retirement plans). This year’s max is $19,000. Many people make the mistake of sticking with whatever contribution gets you the max match from the employer. The reality is you need to save more than that to create a good enough retirement nest egg.  Check where your savings rate is and consider increasing it before the end of the year. 
    • There’s still a few more pay periods before the end of the year. See if you can get as close as possible to maxing out this year. 

  • Contribute to a Traditional IRA or ROTH IRA.  Your income determines which might be better for you. But whichever one turns out to be the winner, you’re allowed to put up to $6,000 in one or the other. 
    • You have a little bit more time to decide on this one and can make a contribution all the way up to April 15, 2020 that counts for 2019.

  • If you work in state or local government or a non-profit you might have access to a 457 plan. This allows you to save double for retirement as the IRS lets you save toward your employer sponsored 401k/403b AND your 457 plan.  Each are capped at $19,000 per year. In 2020 these limits increase to $19,500.
    • Saving extra in these vehicles should only be something you consider as part of a broader financial plan that takes into consideration your goals for the short-term and long-term

  • Invest within a Health Savings Account (HSA). Many are now offered High Deductible Health Care plans at work that allow us to save in an HSA account.  The beauty of an HSA is that IS NOT a use-it-or-lose it account and it stays with you long after you switch jobs or get a new health plan. There’s usually money left over each year after you pay medical costs, so why not invest it?  It’s smart to invest the money you won’t immediately need for health care. And this can grow and compound over time and be used in the future for medical expenses at any stage of life.  
    • Our medical expenses increase as we go through life. It’s wise to set up a system like investing through an HSA to create a bucket of money that can be used for our ever-increasing health care costs. 

  • Invest outside of a retirement account. This might make sense depending on your financial situation. Typically you need to be debt-free, be maxing out retirement sources and still have money left over to consider this option. Be sure that you don’t want to invest money that you may need in the short run, however.
    • It’s one of the best tools to use for leaving the option open to retire early since retirement funds aren’t accessible until after age 59 ½ without penalty.  Funds outside of a retirement account are accessible before then, but you have to make sure you have a long time horizon.  

What Happens if You Can’t Max Out or Take Advantage of All These Options?

Start small.  First, make an initial commitment to increase your retirement contribution by a percent or two.  The next time you get a raise, split half of it with your future self. For example, if you get a 4% raise, put two percent toward retirement (future self) and 2% toward your current self needs.  After a few years of raises you’ll be closer than ever to maxing out your retirement sources. Then you can move on to other savings vehicles.   

Other Tax Planning Options May Help You Put More Toward Retirement

If you’re not comfortable with doing this research on your own, it’s a good idea to find someone to help you do the analysis to figure out what might be right for you. Typically a CPA is good at helping you figure out how things were in the prior year, reporting it correctly, and letting you know what you can still do in the present to address them.  Since you typically meet with a CPA after the first of the year some options might be off the table by the time you get an expert’s opinion.   

A CFP® (that’s me!) doesn’t typically prepare taxes. But one of the things I work on with clients is being more forward thinking and looking at scenarios to help you make better decisions on spending/saving/investing/retirement throughout the year. These decisions undoubtedly have an impact on your taxes. There are some key strategies that go away once Dec 31 is over.  In addition to the question of how much to save for retirement you should also start researching the following: 

  1. Batching your charitable giving when it makes sense and considering whether a donor advised fund will work for you.
  2. How your taxes will be impacted by your taxable investment choices
  3. Tax loss harvesting opportunities in your taxable investments
  4. Paycheck withholdings – you want to withhold enough, but not too much.  Tax withholding needs can change from year-to-year based on income, rule changes, deductions, etc.
  5. Whether your tax bracket will increase or decrease next year. This could make a difference in determining whether it makes sense to take advantage of one of these strategies this year or in a future year.  NOTE: Your tax bracket could increase when you sell investments, get a raise, bonus, equity compensation, or stock options.  Your tax bracket could decrease if you don’t work for part of the year, lose a job or change jobs/salaries.

Many of these strategies can provide you with more free cash flow throughout the year so that you can more easily max out retirement contributions.   As you research, what you may find is that there are no one-size-fits-all answers as it relates to how much to save for retirement or which tax planning strategies make the most sense for you.  What works in one year may not work for you in another year. 

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When’s a Good Time to Review Your Options?

There’s no time like the present.  However, ideally you should be thinking about these options throughout the year, in light of your goals and your budget.   Not everyone needs to max out every last retirement account option. But if early retirement is a goal of yours, long-term savings vehicles such as retirement and taxable investments should be top of mind.  You should also take time to think about your savings plan and tax planning when you get a new job, salary increase or new benefits.

The important thing to remember is that your goals, plans and desires and dreams should be what dictates how much you save, not “rules of thumb” or simple answers. 

Is increasing your retirement savings one of your goals?  Do you have plans to take advantage of any of these strategies before the end of the year?

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