Greg McBride, chief financial analyst at BankRate, joined Cheddar News to discuss the IRS announcement that it would increase 401(k) and IRA contribution limits next year. 

Greg McBride, chief financial analyst at BankRate, joined Cheddar News to discuss the IRS announcement that it would increase 401(k) and IRA contribution limits next year. Data shows 55% of Americans believe they are behind in saving for retirement.

IRS Raises Retirement Contribution Limits

Welcome back to closing bell and cheddar news everyone the I. R. S announcing americans can contribute more to their 401k. And other tax deferred retirement plans next year to make up for inflation. Will the record increase allowing people to contribute up to $22,500 into their retirement plans and up to two that is up $2000 from the current contribution limit contributions to traditional iras. And after tax Roth iras they'll increase as well to 6500 from $6000 this year. And joining me now is Greg Mcbride, chief financial analyst at Bankrate Greg. It's great to see you as so we know that everything is costing more because of persistent inflation. How is it impacting our retirement savings and the options available to us next year. Well great to be with you again kristen and yes that that idea of inflation, the impact that it has on our buying power, it most certainly applies to our retirement savings that we feel that in the everyday budget as the cost of things go up. But you also need to bear in mind that over time buying power is really what's going to pay the bill in your golden years. And so these higher contribution limits all that's really doing is just maintaining the same buying power of the contribution limit that was in effect this year if they didn't increase it would be effectively like allowing people to put less money in than was the case the year before. So these adjustments I think really important to uh continue to foster that retirement saving because at the end of the day when we retire, what we really need is buying power of that money. It's not so much that, you know, the number itself as much as what does buy you in terms of that lifestyle you envision in your golden years. Yeah, I think that's a really good point Greg. So for anyone looking ahead budgeting, uh perhaps wanting to max out their four oh one K. And alongside that there ira contribution, what would you tell them to make sure that they do make the appropriate decision for themselves? What are some of the things that they need to consider when deciding whether or not they want to max out these contributions? Well, if you're in a position to be able to contribute at a healthy enough pace to match those out, that's great. Uh and it's important to, you know, think about both a workplace plan such as a 41 K. As well as an ira not everybody has a workplace workplace based plan, but if you or your spouse have earned income, you're eligible to contribute to an ira. So it's important to bear both of those in mind. If you're not saving at least 10% of your income for retirement, you need to get there pronto. And then Even at that point, I think you want to work on stair stepping that up ideally you want to be at about 15% of your income that you're putting away for retirement and time is of the essence time is your greatest ally and saving for retirement. You benefit the most compounding. But it's also works against you. The longer you wait, the more it hurts you at the other end. So for investors wondering how should I allocate my money? How much should I put towards stocks? How much should I put towards bonds? I mean, crypto is now even an option for some in their own 401K plans. For instance, if they use fidelity as an investing platform, what's the right allocation or the right way to think about the proper allocation for your age group? Well, you want to be very aggressive at a younger age and much like a glide path on an airplane that's on descent to the airport. You can, you know, maybe you dial back that risk gradually over time as you approach retirement and in retirement, couple of cautionary points. Uh, you know, one of the biggest risks is investing too aggressively over the short term, but it's an equally big risk is investing too conservatively Over the long term. So really important for younger investors go very heavy on equities. You're in your 20's. I see nothing wrong with being 90% equities not being said as you get closer to retirement, you're dialing back that risk, but even then you can't do much because you may need that money to last you 25 or 30 years in retirement? So you still need a healthy allocation to equities the day you leave the workforce? Maybe the hardest thing for people. Greg is just identifying, what is that goal in retirement, right? There are several factors at play, the age at which you want to retire, maybe where you want to retire the cost of living in that location, of course some of your hobbies, but then that end goal, right? That that dollar number that's gonna give you the lifestyle that you want, how should consumers think about crafting that goal, that goal that will suit them? Yeah, that's why I think it's really important for us to focus on things like the savings rate. Are you saving 15% of your income for retirement? What's your investment allocation? Are you appropriately invested? Do you have enough inequities in order to get that compound of growth that you need to get the nest egg to retire? Because the specifics that's a moving target, you know, the the life you envision for yourself in your golden years when you're in your twenties and thirties, you know, that's a very distant vision and you're not gonna be able to nail that. Exactly right, So I wouldn't focus so much on that until you get closer to retirement, then you can start to put a finer point on what exactly is that lifestyle that you have envisioned in retirement, what does it cost and what does that dictate in terms of our, you want target to retire when you want to. Are you gonna have to work longer? Are you going to have to scale back your aspirations and also keep in mind age 50 and up? You have higher contribution limits in both the 401k. And Ira here to catch up contributions. I do quickly just want to talk through the differences. Greg if you can lend us a helping, have a helping hand between a Roth and a non Roth ira as consumers think about whether or not that Ira contribution, $6500 is something that they want to consider um in the year ahead. What are their options? Well the traditional is the pre tax contributions. Whether we're talking about the work basically plan or the the ira, that's the pre tax you get a tax deduction, reduces your, your income on the money you put in but you pay at the other end with the Roth, that kind of flips that around. And so the analogy I often use here is think of a snowball rolling down the side side of the mountain. Do you want to pay the tax man at the top of the hill when that snowballs the size of your fist or do you want to pay the tax man at the bottom of the mountain when that snowballs, the size of a car. The beauty of the Roth is you've given Uncle Sam his cut at the top of the hill, You're investing after tax dollars. But as that snow, the ball rolls down the mountain over the years of your working career and grows and grows and grows, you get to the bottom of the hill, that big snowball, that's the size of a car. It is all yours. We talked earlier about buying power of money, that that's really what counts. Well, you need to be thinking of that as well in terms of how much is available after tax. If it's raw, it's all yours. All right. Greg. Mcbride, chief financial analyst at Bankrate. Greg. Always a pleasure. Thank you for coming on.