New rules make saving for retirement easier

According to BlackRock’s 2024 “Read on Retirement” survey, nearly two-thirds of workplace savers are worried about outliving their retirement savings.

This concern is understandable, given one-third of workers currently have less than $50,000 saved for retirement, according to the Employee Benefit Retirement Institute.

The SECURE 2.0 Act of 2022 aims to make workplace retirement saving easier. Starting in 2025, it requires new 401(k) plans to implement automatic enrollment and automatic escalation of participants. These plan features have proven to increase the participation and savings rates of American workers. The act also makes it easier to save in a Roth account, which is a backdoor way of saving more, by allowing employees to voluntarily elect to have their employer’s matching and profit-sharing contributions directed into a Roth account.

Starting this year, the law allows retirement savers between the ages of 60 and 63 to make what the industry is calling a “super catch-up” contribution. This provision enables eligible individuals to make a contribution of $11,250, while the regular “catch-up” contribution limit for everybody else older than 50 in 2025 is $7,500. Starting next year, the law requires savers older than 50 who earned more than $145,000 in 2025 to direct any “catch-up” contributions they make into a Roth.

For those already in retirement, the law increases the age for Required Minimum Distributions (RMDs) to 73 for individuals born 1951-59 and to 75 for those born in 1960 or later. Starting in 2024, it also eliminates RMDs from Roth 401(k) accounts during the owner’s lifetime, aligning them with Roth IRAs.

The key question these new tools should inspire you to ask is whether you’re on track to afford stopping work while maintaining your desired lifestyle in retirement. It’s a challenging question, involving numerous hard-to-predict variables. The chart below provides a framework to help assess your retirement readiness.

If you’re like many Americans and your current retirement savings are lacking, there’s no time like the present to develop a plan to get on track. With numerous financial priorities competing for the money remaining after paying monthly bills, creating a robust retirement savings strategy can seem daunting.

I suggest you prioritize future savings accordingly:

How you invest your retirement savings will also play an important role in accomplishing your retirement savings goal. Building wealth for retirement is easier when you’re properly invested and the markets cooperate. Lately, the U.S. stock market, which large-cap growth stocks have led, has been the best-performing asset class in the world. But history shows while bull markets are the norm, bear markets often interrupt them — twice a decade on average.

Through the long haul, U.S. stocks subject investors to a reasonably predictable roller coaster ride, as demonstrated in the graph below. The key is to stay invested and well-diversified during a bear market, rebalance after large market moves (either up or down), and keep investment expenses low (ideally under 0.50%).

Two current headwinds are likely to make it more difficult for people to achieve their retirement savings goal: inflation and the current U.S. stock market valuation. Inflation drives up the target amount of savings you’ll need to be able to afford things in the future. The raging bull market we’re currently experiencing increases the likelihood of below-average U.S. stock market returns through the next 15 years.

While the new retirement plan rules are designed to help American workers save more for retirement, the data doesn’t lie: Most need better discipline to create a savings and investing plan for retirement. There is no time like the present to evaluate whether you’re on track, and if not, execute a strategic course correction to be so.

Michael J. Francis is president of Francis LLC, a registered investment adviser with offices in Minneapolis and Brookfield, Wis. He can be reached at michael.francis@francisway.com. The information contained herein is provided for informational purposes only.