If you feel financially unprepared for your golden years, you’ve got company.
More than one-third of Americans have nothing saved for retirement and 14 percent of those 65 and older have no retirement savings, according to a recent Bankrate.com survey.
But that could soon change thanks to strategies the government and some companies are putting into place to help Americans fortify their 401(k)s.
Upped Contribution Limits
On Thursday, the IRS raised the maximum for 2015 contributions to the government’s Thrift Savings Plan and private sector 401(k)s to $18,000, up from $17,500 this year. Those over 50 years old who need to “catch up” can now contribute an additional $6,000, up from $5,500.
For employees investing in both an after-tax Roth IRA and a pretax retirement account, the $18,000 limit applies to the total of both accounts. The SEP-IRA or single 401(k)contribution limit for small business owners or those who are self-employed jumps to $53,000, from $52,000 last year.
Deferred Income Annuities
For those worried about draining their nest eggs, the government is promoting the use of deferred income annuities in 401(k) accounts. The Treasury Department and IRS released guidelines Friday to allow employers to voluntarily allow employee contributions to be placed in deferred income annuities. That means employees can elect to trade a lump-sum portion of their 401(k) contribution for monthly income payments that are guaranteed to last for life.
Whether that makes sense, though, depends on your situation. Annuities are attractive because they provide the ability to build tax-deferred savings and generate a steady stream of income in retirement. But they can also come with hefty fees—of as much as 3 percent a year or more—and returns vary depending on the annuity.
“Some of the benefits of an annuity, such as tax deferral, are already present in retirement accounts without any additional costs,” said Jason P. Flurry, a certified financial planner and president of Legacy Partners Financial Group in Georgia, adding, “There are other ways to earn a safe, more competitive return.”
Still, for those who are at or near retirement, annuities can provide peace of mind.
“The one fear that all retirees share is running out of money during retirement,” said Jeff Rose, CEO and founder of Flemington, N.J.-based Alliance Wealth Management. “Having a deferred income annuity will solve much of that by offering an income stream that will last a lifetime.”
Auto-Enrollment and Auto-Increase Policies
A growing number of companies are helping their employees save by building auto-enrollment and auto-increase policies into their 401(k) plans.
The latest Bank of America Merrill Lynch 401(k) Scorecard, released this week, found 213 plans offered both features by this past summer, an increase of 19 percent over 2013. And nearly all employers (94 percent) that added auto enrollment during the first half of this year also added auto increases, compared with just half who did so during the same period last year.
Firms that participate in auto-enrollment automatically deposit a certain percentage of an employee’s salary into the company’s 401(k) plan unless he or she actively opts out. Those that offer an auto-increase option raise an employee’s contribution percentage by a specified amount each year unless that employee opts out.
Research has found that few do.
The Transamerica Center for Retirement Studies released a survey this week that found 70 percent of workers who are offered a plan say they’d be likely to take advantage of automatic increases in their contributions by one percent of their salary either annually or when they receive a raise. “Automatic increases can help drive up savings rates,” said Catherine Collinson, president of the Transamerica Center for Retirement Studies.
“Most people won’t feel a blow increasing from 6 percent to 7 percent in the short-term,” said Rose, “but the long-term effects can yield sizeable gains.”
Many American workers saw matching contributions to their 401(k) plans disappear during the recession and immediately afterward, but that trend is starting to reverse.
The number of firms offering matching contributions fell from 80 percent in 2007 to approximately 70 percent from 2009 to 2012, according to the Transamerica Center for Retirement Studies study. But the same report found 77 percent of plan sponsors are offering a match this year, bringing the percentage nearly back to pre-recession levels.
But in order to capitalize on any of these strategies, Americans need to commit to saving for retirement and stick with it, financial advisors say, starting with getting a 401(k) up and running.
“For most people, the hardest part of getting started in their 401(k) is just that: getting started,” said Rose.