The start of a new year is a great time to make sure you're on track for a secure retirement. Here are some ways to get ready for retirement in 2013:
Save 1 percent more. Set your direct deposit to your 401(k) or IRA to be slightly higher next year. "I would increase the percentage 1 percent, and if, after three months, I am paying my bills and having a little fun, I would raise that another 1 percent," suggests Gail MarksJarvis, author of Saving for Retirement (Without Living Like a Pauper or Winning the Lottery). "If I am getting a raise in the new year, my resolution would be to provide half of my raise to a 401(k) or an IRA before I ever take that pay home."
Max out your employer benefits. Saving for retirement is easier when your employer chips in. Make sure that you sign up for your workplace retirement plan and save enough to capture the 401(k) match or other contributions offered by your company. An employee who earns $50,000 a year and gets a 3 percent employer match could get as much as $1,500 annually from the company for their retirement.
Make use of new 401(k) fee information. Retirement savers will get new information about the fees and other charges being deducted from their 401(k) this year in the form of quarterly and annual statements. Take a look at the costs of your investment options and how your returns compare to the benchmark. If your funds aren't delivering enough value to be worth the cost, consider switching to investments with lower fees. "Ideally you should be paying no more than half a percent on investments in your 401(k)," says MarksJarvis. "You need to make sure that all fees on investments, whether in a 401(k) or IRA or other account, are as low as possible."
Claim retirement-saving tax breaks. You can defer taxes on up to $17,500 in a 401(k), 403(b), or the federal government's Thrift Savings Plan in 2013, $500 more than in 2012. The IRA contribution limit will also increase by $500 to $5,500 in 2013. People age 50 and older can defer taxes on another $5,500 in 401(k)s and $1,000 for IRAs. Low-income workers who save in retirement accounts and earn less than $29,500 for singles, $44,250 for heads of household, and $59,000 for couples can additionally claim the saver's tax credit, which is worth up to $1,000 for individuals and $2,000 for couples.
Consider a Roth. If you do all your retirement saving in traditional 401(k)s and IRAs, you could end up with a very large tax bill in retirement. Consider doing some of your retirement saving in an after-tax Roth account. In Roth 401(k)s and Roth IRAs, you pay taxes on your contributions upfront, but no tax will generally be due on withdrawals, including the earnings, in retirement. Roth accounts also generally give you easier access to your money before retirement and more withdrawal flexibility in retirement. "The money in a Roth can be passed down to future generations without another tax if you don't need to use it," says Jean Chatzky, host of Money Matters on RLTV and a Today Show financial editor.
Get your Social Security statement. Most workers will no longer receive a paper Social Security statement in the mail. But now people age 18 and older can access their Social Security statements online. Take a few minutes to check that your earnings history has been property recorded and familiarize yourself with your expected Social Security payout. "Delaying Social Security makes sense for most people if you can afford to do it, because the payout escalates enormously for every year you wait between ages 62 and 70," says Chatzky. "That's a return that is really hard to beat by putting your own money to work."
Run your numbers. Once you know how much you will get from Social Security (and a pension if you have one), figure out how much you need to save for retirement. To do a quick calculation, estimate the annual income you need to pay all your bills, subtract the amount you will get from Social Security and a pension, then multiply that amount by 25 or 30 years, recommends Steve Vernon, president of the retirement consulting firm Rest-of-Life Communications and author of Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck. "I think anybody of any age, whether they are young or old, ought to calculate out how much money they need to save for retirement, and if they are older, they should calculate out how much they need to finance their lifestyle."
Make a 2012 IRA contribution. While 2013 is too late to make 2012 401(k) contributions, there's still time to make a 2012 IRA contribution that will save you money on your current tax bill. Investors have until April 15, 2013, to make 2012 IRA contributions. Just make sure you tell the financial institution which tax year you want the deposit to count toward.
Downsize your lifestyle. You'll be able to get by with a smaller nest egg if you look for ways to cut costs before and after retirement. You might be able to do this by moving into a smaller house or condo once your children move away, moving to an area with a lower cost of living, or selling a second car you won't need in retirement. "Look for ways to downsize your lifestyle, whether it is your home or your cars," says Vernon. "Anticipate that you might need to reduce your lifestyle and take those steps before your back is against the wall."
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Decide how you will spend your time. Once your retirement finances are in place, you'll also need a plan for how to spend your time in retirement. "Slowly start thinking about what you want your next chapter to be about," says Marci Alboher, vice president of Encore.org and author of The Encore Career Handbook: How to Make a Living and a Difference in the Second Half of Life. "Then do some experiments to test out your ideas. Volunteer for an organization in your neighborhood. Make some coffee dates with people who have used their retirement in meaningful ways."
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