Many Americans are aware that a number of tools exist to assist them in their efforts to ease the financial burden experienced when they stop working and retire.
While working, for example, people can often invest in 401(k) plans. In retirement, Social Security payments become an important piece of their income.
An employer-sponsored 401(k) plan is a strong financial device that offers tax advantages. Many employees believe that simply contributing enough to it to max out an employer match is enough.
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To truly maximize their retirement savings, however, it is important for workers, if they are able, to make contributions to their 401(k)s well above the amount their employer will match.
Depending on one's expenses, this is sometimes difficult. One solution is to start by contributing up to the employer match, and then as finances improve, increase those contributions over time.
Investments in a 401(k) are generally geared toward mutual funds, stocks and bonds. In a traditional 401(k), they grow tax-deferred, meaning taxes are postponed until a person begins making withdrawals after they retire.
It's important to avoid early withdrawals. This results in penalties in addition to the taxes one must pay when withdrawing money.
Another important thing to know when planning ways to maximize your 401(k) is that you should understand catch-up contributions.
Simply put, the annual 401(k) contribution limit for 2024 is $23,000. But if you over 50 years old, you can play catch-up by taking advantage of the opportunity to add another $7,500 to that amount.
Maximizing Social Security payments for steady retirement income
Another major financial fact of retirement is that people begin receiving Social Security checks at the age they choose to claim them, usually between the ages of 62 and 70.
Generally speaking, the sooner people retire, the lower the monthly payments they receive. As they choose to retire later and later, the monthly payments grow higher and higher.
About three months before each birthday, workers receive a statement from the Social Security Administration (SSA) with information on their earnings per year. It also includes estimates of the payments one will receive. This information is also available from the SSA's website.
More on Social Security:
- Social Security benefits report confirms major changes are coming
- How to maximize Social Security survivor benefits in retirement
- How average Americans can better plan for 401(k), retirement income
Besides retiring at a later age, there are other ways to maximize the payments one receives from Social Security.
The first is to work as many years of your adult life as possible. This is because the calculation of Social Security benefits is based on a formula that relies on a worker's highest-earning 35 years.
Another consideration to boost this number is to take on a side job to add to a person's annual income. This will boost the amount of money that worker receives in their Social Security payments.
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Maximizing Social Security benefits with regard to retirement age
As discussed above, working more years before claiming Social Security benefits will result in larger checks.
At age 62, Americans are eligible to retire, but their full retirement age in 2024 is actually 67.
But waiting until even later to retire, up to age 70, will increase the amount of their payments even more. Benefits grow by around 8% each year that a person delays applying for them beyond the age of full retirement.
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It's also important to note that spousal benefits are a part of the Social Security program.
For example, when a spouse dies, the still-living spouse can receive a portion of the deceased one's benefits. The amount of those payments is dependent on how long the deceased spouse had been collecting their benefits.
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