Last Updated: September 21, 2009
Good news if you're saving and investing for retirement. The Internal Revenue Service (IRS) recently increased tax incentives for retirement savings. As part of an initiative to increase taxpayers' retirement savings, the IRS has made it easier for 401(k) plans to allow automatic enrollment. What's more, the IRS will be giving you a box to check on Form 1040 that allows you to buy savings bonds with your tax refunds, and Uncle Sam is going to let you contribute cash payments for unused vacation time to your 401(k) plans as well.
So, what do financial planners have to say about the IRS' new incentives and what should you do given those changes? In general, financial planners are applauding the incentives. "It has the possibility to get folks to save, especially the unused vacation time," said FPA member Harry K. Foote, CFP®, of Smart College Solutions. "The savings bonds are good for the government as well."
Others agreed. "Given our anemic national savings rate, any incentive for Americans to save more money and consume less, in my opinion is a good and healthy habit," said FPA member Kathleen B. Leipprandt, CFP®, ChFC, CLU of Baldwin Financial Systems, LLC. "We understand that currently, if Americans don't spend, but save, it will not speed up our national economic recovery. But we must, as individuals, start to save if we are to retire at a reasonable age with sufficient income."
Those incentives notwithstanding, Leipprandt suggests that you strive to save a minimum of 10 percent of gross income annually, and target saving 20 percent ultimately. "If you can do this, then when times get tough, and they will, you will have the cash to accommodate your new needs," said Leipprandt.
The big benefit of saving 20 percent is this. "It forces you to live on 80 percent of income, which is another helpful habit when retirement time comes," said Leipprandt. For example, if you make $100,000 per year and save $20,000 in retirement accounts, that means you'll live on $80,000, less taxes and expenses. "When you get to retirement, you not only have a 'side fund or funds' accumulated to assist you in providing income, but you are used to living on $80,000, not $100,000," she said. "It is an easier target to hit due to higher savings and lower need."
Besides saving 20 percent of your income, Leipprandt said, "it's equally important to save and to invest within your time horizon and tolerance for risk, and not just invest 100 percent in cash."
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