CPA Garrett Wagner of the New York State Society of CPAs discussed saving for retirement and the mistakes to avoid Monday during News 8 at Sunrise.
Wagner said people should keep in mind that expenses won’t decrease during retirement. Although everyday purchases may change after retirement, health care in retirement can be costly. For most Americans, Social Security won’t be enough to cover monthly expenses in retirement. Medicare is not free and does not cover all medical expenses, including long term care.
“Save as early as possible,” said Wagner. “The compounding of contributions and earnings from year to year is greater the longer you have before retirement. If you haven’t started, start today. Even if you are 50 years old, there is still time to build up your savings before retirement.”
Wagner said a great way to save for retirement is taking part in your employer sponsored retirement plan, if one is available to you. “You won’t miss the small amount you contribute,” he said. Common employer sponsored plans are 401(k) or 403(b) plans, SIMPLE IRA, and SAR/SEPs. In a 401(k) plan the maximum contribution this year is $18,000. If you are 50 or older you can contribute an additional $6,000. The maximum contributions vary from plan to plan and can change each year.
As it relates to employer sponsored plans, there is one key mistake to avoid. Wagner said many plans have an employer match that employees do not take full advantage of when making a retirement contribution. For example, an employer may match six percent of an employees contribution, but the employee only contributes three percent of their income to the plan. In effect, they leave an additional three percent of potential contributions from the employer on the table.
In addition to employer sponsored retirement plans, Wagner said you can also make contributions to traditional IRAs and Roth IRAs. He noted while contributions are pre tax and grow tax free in employer sponsored plans like a 401(k) and in a traditional IRA, when it comes to a Roth IRA contributions are made post tax. Earning are tax free and distributions are tax free provided you have reached retirement age.
Wagner said if you need help putting a retirement plan together, speak with a trusted CPA or financial advisor.
For more information, visit the New York State Society of CPAs website, click here.