Are Americans Putting Vacations Ahead of Retirement Savings?

Source: Thinkstock
Source: Thinkstock

If you’ve been cooped up in a cubicle for the last couple of months, it’s understandable that you’d want to go out and enjoy some fun in the sun. But if going on an expensive vacation means putting retirement savings on hold (or not saving at all), you might want to think twice before packing your bags.

A recent survey by TIAA-CREF found that many Americans are putting fun ahead of savings. The report finds that 24% make short-term savings (for example, vacations and appliances) their first priority when it comes to savings. Among the survey respondents, only 18% say they contribute to an IRA. Roughly 16% reported that they have an IRA, but do not contribute anything to the account.

On a more positive note, among those who do contribute to an IRA, 40% say they are contributing the maximum amount. In addition, 56% of those who are not contributing to an IRA said they would think about adding an IRA to their retirement savings strategy.

The Cheat Sheet chatted with TIAA-CREF’s Dan Keady to gain more insight into this study.

The Cheat Sheet: Why do you think people are prioritizing needs over wants when it comes to investing?

Dan Keady: Lack of understanding about IRAs may help explain why some Americans don’t consider contributing to one a priority. Among survey respondents, 42% said both that they are not currently contributing to an IRA and that they would not consider one as part of their retirement strategy. Of this group, 39% said they don’t know enough about IRAs to consider one. With multiple goals competing for Americans’ income, individuals need help taking a balanced and long-term perspective to their savings.

CS: Why aren’t more people contributing to an IRA?

DK: An IRA can offer a great way to help build additional savings for retirement. Once people know about IRAs and understand the difference an IRA can make, they tend to take advantage of this option.

An IRA might:

  • Boost your retirement savings: Even if you already contribute to an employer-sponsored retirement plan, you may be able to contribute to an IRA. If you can, it’s best to consider investing the maximum amount to both your employer-sponsored retirement plan and your IRA every year. With the additional savings and careful investment strategies, you’ll be better positioned to live comfortably in retirement.
  • Help your money accumulate faster: When you invest in an IRA, your contributions and potential earnings can compound over time while growing tax deferred (in the case of a Roth IRA, your withdrawals may be completely federal tax free, provided they meet certain criteria). Since tax-deferred investments can help your money compound at an even faster rate than money in non-tax-advantaged investment vehicles, an IRA can potentially help you build additional funds for retirement.
  • Simplify your finances: If you have retirement assets in more than one IRA or employer plan, you may want to consider consolidating this money by rolling it into a single IRA. Consolidating your savings with one provider can make it easier to manage your accounts and investment allocations, keep track of paperwork and potentially reduce the fees you pay. Be sure to consider the pros and cons of staying in your workplace plan before consolidating.
  • Create flexibility in retirement: With an IRA, you have options for generating income in retirement. You can take cash withdrawals to pay for unexpected expenses, set up a regular withdrawal schedule to help cover monthly expenses, or plan to take your required minimum distributions. Remember, you can use an IRA as your sole savings vehicle for retirement or save both in your workplace retirement plan.

CS: What are some benefits of maxing out an IRA?

DK: Besides helping you save for your future retirement, IRAs can also provide tax advantages today. If you contribute now to a traditional IRA, you will not pay taxes on your earnings until you tap into those funds in retirement — and many taxpayers can receive an up-front income tax deduction on contributions to a traditional IRA. And although the money you save in a Roth IRA isn’t tax deductible, you can withdraw both your contributions and earnings tax-free in retirement.

Your chance to save doesn’t end on December 31 — you can make contributions that count for the previous tax year through April 15. You can save as much as $5,500 each year into a traditional or Roth IRA. You can contribute up to $6,500 if you are 50 or older.

Even better, contributing the maximum to both your employer-sponsored retirement plan and an IRA can help fast-track your retirement savings. For the 2015 tax year, you may be able to save a combined total of $23,500 to both an IRA and workplace retirement plan, or as much as $30,500 to both accounts if you’re 50 or older.

If you have an IRA, make sure to contribute so that you can begin building a secure future for yourself when you retire. Don’t put needs ahead of wants at the expense of future savings. If you need a refresher to see how much you can contribute to an IRA, here’s a handy chart provided by the IRS.

If your filing status is… And your modified AGI is… Then you can contribute…
married filing jointly or qualifying widow(er)  < $183,000  up to the limit
 > $183,000 but < $193,000  a reduced amount
 >  $193,000  zero
married filing separately and you lived with your spouse at any time during the year  < $10,000  a reduced amount
 > $10,000  zero
single, head of household, or married filing separately and you did not live with your spouse at any time during the year  < $116,000  up to the limit
 > $116,000 but < $131,000  a reduced amount
 > $131,000  zero

Source: Internal Revenue Service
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