The COVID-19 pandemic forced millions of Americans to temporarily reduce or halt their retirement plan contributions, and many even had to crack open their nest eggs to help pay the bills. But the nightmare that was 2020 is now behind us and a fresh year lies ahead.
If you're looking to get your long-term financial plans back on track, or ensure that they stay on track, start by taking the following three retirement planning steps.
1. Update your beneficiaries, if necessary
Now's a great time to review your retirement account and insurance beneficiaries to make sure the right people will get your money should you pass away. If someone whom you had named as a beneficiary has died, you'll need to pick a new one. And couples who got married or divorced in the past year will want to review all their accounts too.
Check with your plan administrators to see who your current beneficiaries are, and update them if necessary. Remember to check all of your retirement plans if you have several. It's easy to forget about retirement accounts with old employers, so be sure you haven't overlooked updating those. You also might consider rolling over the funds in those old accounts into an IRA where you can more easily manage them.
2. Review your retirement plan to see if you're still on track
Look at your current retirement account balance and rerun your retirement calculations to find out whether you're on track for your goals -- and if not, how far behind you are. This is an especially important task for people who reduced the amount they were saving over the last year or who made early withdrawals from their retirement accounts.
If you're behind where you'd like to be, you may have to increase your savings rate to catch up. That could require you to make some alterations to your budget, like limiting discretionary purchases. Or if that's not possible, you may have to rethink your long-term plans. Pushing your scheduled retirement date back could allow you to save what you need, so do the math and figure out how much longer you'd have to work to achieve a more financially secure position.
Check your retirement account online or ask your plan administrator if you're not sure how much you're currently contributing to your retirement plan, then determine whether you need to revise your contribution level. You can adjust it at any time throughout the year.
3. Decide which retirement accounts to contribute to
Deciding where to stash your retirement savings is pretty straightforward if you only have one account, but if you have more than one, you'll want to think critically about how much should go into each account, and which ones you want to prioritize.
If your company offers its employees a 401(k) with a match, it makes sense to fund that first, because otherwise, you're leaving free cash for your retirement on the table. So, try to contribute at least enough to get your full employer match before you put money anywhere else.
If your company doesn't offer a match -- or once you've claimed it in full -- the decision comes down to personal preference. You may prefer to route your retirement savings into an IRA rather than a 401(k) because they usually offer more flexibility about investment choices and lower fees. You could also base your decision on when you want to pay taxes. Contributions to tax-deferred retirement accounts -- like 401(k)s and Traditional IRAs -- will reduce your taxes for this year, but you will have to pay taxes on your withdrawals later. Contributions to Roth IRAs and Roth 401(k)s won't affect your taxes this year, but when you make withdrawals in retirement, they'll be tax-free.
Whichever types of accounts you choose to fund, be mindful of the annual contribution limits. You may contribute up to $19,500 to a 401(k) and $6,000 to an IRA in 2021. People 50 and older may contribute up to $26,000 and $7,000, respectively. These limits apply to all of your retirement accounts of that type and exceeding them results in penalties.
These three steps can help you start the new year off right, but the key to successful retirement planning is consistency. Make regular contributions throughout the year and don't forget to update your retirement plans any time your financial situation changes.