The Federal Reserve Chair, Jerome Powell, announced that the central bank plans to cut interest rates. Powell explained that central bank policy works with “long and variable lags.” This suggests that waiting until inflation hits the 2% target might be too late. Powell did not specify when the Fed might start to cut rates.
Their next policy meeting is at the end of July. Interest rate cuts are welcome news for those wanting to buy a home. However, studies show many millennials may not have the savings to make big purchases.
They are also far from meeting their retirement savings goals. On average, Americans say they’ll need around $1.46 million saved up to retire comfortably, according to a Northwestern Mutual study. For millennials, the majority of whom are in their 30s, that number is slightly over $1.6 million.
However, the median 401(k) balance for people in their 30s is only around $22,100 as of the first quarter of 2024, according to Fidelity Investments. Many Americans struggle with saving for retirement due to inflation and economic difficulties after the pandemic. Increased credit card debt across the country has made it challenging for people to put extra money toward their savings.
The concept of ‘money dysmorphia’ and the pressure from social media have contributed to many millennials and Gen Zers spending too much. Financial experts emphasize the importance of starting retirement savings early. Boomers began saving for retirement at 37, while Millennials started at 27, and Gen X at 31.
Younger generations also expect to retire earlier, which means their savings need to last longer. Josh Perkins, vice president at DeWitt & Dunn Financial Services, advises that the best time to start saving for retirement was ten years ago. But the second-best time is today.
Fed’s rate cuts and retirement challenges
For 2024, individuals can contribute up to $23,000 to a 401(k) plan. Perkins recommends contributing 10% to 15% of every paycheck to a 401(k).
Or at least enough to get the company match. Automating contributions directly from paychecks into retirement accounts can prevent the temptation to spend rather than save. Increasing the contribution percentage over time is also advised.
An additional 1-2% annually or twice a year is recommended. Planning for taxes is crucial in retirement savings. Perkins notes that withdrawing from retirement accounts in retirement could result in a tax rate of 20 to 30%.
Strategies to minimize taxes include making charitable donations from taxable accounts and utilizing Health Savings Accounts (HSAs) for medical expenses. Considering Roth IRAs, which offer tax-free growth and withdrawals, is also an option. Opening individual retirement accounts (IRAs) can provide additional income in retirement.
Traditional IRAs offer tax-deductible contributions and tax-deferred growth. Roth IRAs feature tax-free growth and withdrawals. For workers aged 50 and older, retirement accounts allow additional catch-up contributions.
In 2024, the catch-up contribution limit is $7,500. Saving as much as possible while still earning a paycheck is crucial for those serious about retiring. Federal Reserve’s planned interest rate cuts bring hope.
But reaching retirement savings goals remains a challenge for many Americans. Starting early, automating contributions, considering tax implications, and using additional retirement accounts and catch-up contributions are key strategies for financial security in retirement.
