If you are one of the millions of Americans who contribute to a defined contribution retirement plan, there are two reasons to rethink the level of your contribution for 2012.
The first is that it is well established that contributing less than 10% of your salary diminishes your chance for meaningful retirement income. If you are not maxing out the annual deferral limits, review the level of your current deferrals. If it is less than 10%, implement a strategy to raise the percentage that goes to your retirement account.
If you don’t recall your current deferral percentage, ask your HR department. An alternative is to look at your pay stub and divide the amount of your retirement account contribution by the total pay for the pay period.
Let’s say that your current deferral percentage is 6% but you don’t feel that you can afford to put 4% more into your retirement with the house payment and your other bills and expenses.
One strategy would be to raise your contribution 1% in January and then raise it 1% again in January in each of the following three years. You would be increasing your contribution a reasonable amount without the financial hit of jumping it up all at one time.
Another method of increasing your contribution would be take one-half of your next raise as increased income, and defer the other half to your retirement plan.
The second reason to revisit your level of contribution is that the limits are about to be raised. These changes will impact only those that max out the deferral amounts, which tend to be doctors, attorneys, engineers, business owners, or executives.
On October 20, 2011 the Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for Tax Year 2012. The changes were triggered because the increase in the cost-of-living index met the statutory thresholds.