They should also not overlook the opportunity to invest in an IRA, said Joe Jennings, senior vice president of PNC Wealth Management in Baltimore. While having a retirement plan at work might impact an individual’s ability to deduct IRA contributions for tax purposes, “it does not close the door to the individual retirement account,” he said.
Allocating funds into your 401(k) and an IRA provides the opportunity to invest more for retirement. An individual can contribute up to $18,000 to his employer’s 401(k) plan for 2015, plus an extra $6,000 “catch up” contribution if he will be age 50 or older by the end of the year.
“Imagine that starting at age 40, an individual contributed the 2015 maximum not including the catch up amount for 25 years and the account earned an average annual return of 7%,” Jennings said. “That person’s account could hold as much as $1.2 million at age 65.”
If you want to contribute even more, team that up with an IRA. For 2015, a person may be able to contribute up to $5,500 to an IRA, plus an extra $1,000 if he is 50 or over. Depositing $5,500 a year for 25 years in an IRA that earns 7% a year would hypothetically add nearly $375,000 in assets, he said.
“An individual in his or her 20s can see even more dramatic results,” Jennings said. “If an investor starts saving now, imagine what he or she will have when they are 65. Even if an individual can’t afford to fully fund a 401(k) plan, anything he or she does now will have a positive impact years from now.”