Remember the 3 A’s for retirement saving: amount, account, and asset mix.

Key takeaways

• Amount: Aim to save at least 15% of pre-tax income each year toward retirement.
• Account: Take advantage of 401(k)s, 403(b)s, HSAs, and IRAs for tax-deferred or tax-free growth potential.
• Asset mix: Investors with a longer investment horizon should have a significant, broadly diversified exposure to stocks.

No one needs to tell you that you need to save for your future—hopefully, you’re already doing it. After all, no matter your age and how far away retirement is, you want to be able to enjoy retirement

“It’s important to focus on 3 main things during your working years:

• the amount you save,
• the accounts you save in, and
• your asset mix,”

says Ken Hevert, Fidelity senior vice president of retirement. “Of the 3, of course, the first is the most important, as no account or asset mix can make up for not saving enough.”

1. Amount: How much and how long

We suggest starting as early as possible and consider saving at least 15% of pre-tax income each year toward retirement to help ensure enough in savings to maintain your current lifestyle in retirement.

The good news: That 15% savings rate includes any matching or profit sharing contributions from your employer to your 401(k) or other workplace savings account, like a 403(b) or governmental 457(b) plan. An employer match can make saving 15% easier.

Of course, the longer you wait to start saving, the more important it is to take advantage of every opportunity to contribute the maximum to your 401(k)—which may be more than 15% of income.

In 2022, you can contribute up to $20,500 pre-tax to your 401(k). If you’re at least age 50, you can add a catch-up contribution of $6,500 pre-tax.

In 2022, the annual contribution limit for IRAs, including Roth and traditional IRAs, is $6,000. If you’re age 50 or older, you can contribute an additional $1,000 annually.

Health savings accounts (HSAs) are another type of tax-advantaged account. To open an HSA, you usually need to be enrolled in an HSA-eligible high deductible health plan (HDHP).

The 2022 IRS contribution limits for health savings accounts (HSAs) are $3,650 for individual coverage and $7,300 for family coverage.

If you’re 55 or older during the tax year, you may be able to make a catch-up contribution, up to $1,000 per year. Your spouse, if age 55 or older, could also make a catch-up contribution, but will need to open their own HSA.

Even if you can’t contribute 15% of your income right now, try to contribute enough to get the entire employer match in a workplace account, which is effectively “free” money, and then try to step up your savings as soon as you can.

2. Account: Where you save

Be sure to make the most of retirement savings accounts like 401(k)s, 403(b)s, and IRAs. If you have an high deductible health plan (HDHP), consider taking advantage of health savings accounts (HSAs), which can offer one of the most effective means of saving for qualified medical expenses now and in retirement. Depending on the type of account, your contributions can grow tax-deferred or tax-free.

With a traditional 401(k) or IRA, your contributions are pre-tax, which means that they generally reduce your taxable income and, in turn, lower your tax bill in the year you make them. Your contributions won’t avoid taxes entirely; you’ll pay income taxes on any money you withdraw from your traditional 401(k) or IRA in retirement.

A Roth 401(k) or IRA works the opposite way. Contributions are made after-tax, with money that has already been taxed, and you generally don’t have to pay taxes when you withdraw from your Roth 401(k) or Roth IRA.

So how does a person determine which type of 401(k) or IRA to contribute to: a traditional or Roth account? There are several things to consider, but for many, the answer comes down to a simple question: Am I better off paying taxes now or later? For those who expect their tax rate in retirement to be higher than their current rate, tax-free withdrawals from a Roth 401(k) or IRA might be a better choice. On the other hand, for those who expect their tax rate to go down in retirement, a traditional 401(k) or traditional IRA may make more sense.

For those who can, it may make sense to contribute to both a traditional and a Roth account. That can provide the flexibility of taxable and tax-free options when it comes time to take withdrawals in retirement, which can help manage taxes. Those who aren’t sure of their future tax picture could choose to make both types of contributions.

It’s important to note that if you get an employer match or profit-sharing contribution from your employer, those contributions are always to a traditional 401(k), even if you are making only Roth 401(k) contributions. So you may already be contributing to both types of accounts.

Alternative saving options to consider:

If you’re self-employed or a small-business owner, then small-business retirement plans like a self-employed 401(k) or SIMPLE or SEP IRA allow you to set aside a certain percentage of your income.

You may be able to contribute to an IRA even if you aren’t working. As long as one spouse works, the non-working spouse can have a spousal IRA and contribute to their own traditional IRA or Roth IRA. You must file a joint federal income tax return. Spousal IRAs are also eligible for catch-up contributions.

If you have an HSA-eligible health plan, money contributed to an HSA is tax-deductible.2 And withdrawals for qualified medical expenses—now or in the future—are tax-free (that includes the money contributed as well as any earnings).

The cost of health care in retirement will likely continue to increase, so it can be a good idea to prepare specifically for those expenses.

According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2021 may need approximately $300,000 saved (after tax) to cover health care expenses in retirement.

Saving in an HSA can reduce the amount you need because contributions, earnings, and withdrawals are tax-free when used to pay for qualified medical expenses.

If you have an HSA, consider contributing money above and beyond the amount you think you’ll need for the current year’s health care expenses. If you’re able to invest some of it for the future, you may have some of your future health care expenses covered.

3. Asset mix: How you invest

Stocks have historically outperformed bonds and cash over the long term. So when investing for a goal like retirement that is years away, it can make sense to have more invested in stocks and stock mutual funds. But higher volatility also comes with investing in stocks, so you need to be comfortable with the risks.

We believe that an appropriate mix of investments should be based on your time horizon, financial situation, and tolerance for risk. As a general rule, investors with a longer investment horizon should have a significant, broadly diversified exposure to stocks.

Take a look at our 4 investment mixes3 (see chart) and how they performed historically over a long period of time. As the chart illustrates, the conservative mix has historically provided much less growth than a mix with more stocks, but less volatility too. Having a significant exposure to stocks that’s appropriate for your investing time frame may help grow savings.

Choose the amount of stocks you are comfortable with

Data source: Fidelity Investments and Morningstar Inc, 2020 (1926-2019). Past performance is no guarantee of future results. Returns include the reinvestment of dividends and other earnings. This chart is for illustrative purposes only and does not represent actual or implied performance of any investment option. See below for detailed information.

Think ahead

When retirement is years away and you have many other financial demands, it may be hard to focus on the future, but saving for retirement with the 3 A’s in mind can help.

References:

1. https://www.fidelity.com/viewpoints/retirement/successful-saving

The Congressional Budget Office (CBO) projects that under current law the U.S. Federal Debt will double as a share of the economy over the next 30 years, rising from 100 percent of GDP in 2021 to 200 percent in 2051. The Concord Coalition

Elected leaders have long known that the federal budget is on an unsustainable trajectory, yet elected leaders of both parties have “delayed, dodged or simply ignored the warnings”, writes Robert L. Bixby, executive director of The Concord Coalition. In fact, elected leaders have recklessly piled on new fiscal spending and cut federal taxes.

In fiscal year 2020, the reported federal budget deficit increased for the fifth consecutive year. Driven largely by the federal government’s response to the COVID-19 pandemic, the federal budget deficit for fiscal year 2020 reached $3.1 trillion—triple the level in fiscal year 2019. This represents the largest budget deficit as a share of GDP since 1945.

The unsustainable fiscal path strains the federal budget and contributes to growing debt.

• Federal Deficit – The federal deficit is the amount by which the government’s spending exceeds its revenues for a given period, usually a fiscal year.
• Federal (National) Debt – Federal debt is the amount of money that the federal government owes, either to its investors (debt held by the public) or to itself (intragovernmental debt).

According to CBO, high and rising federal debt increases the likelihood of a fiscal crisis and could lead to a large drop in the value of the dollar or to a loss of confidence in the government’s ability or commitment to repay its debt in full.

Consequences of rising debt. Rising debt could also cause policymakers to feel restrained in their capacity to support the economy during a downturn or unexpected events, such as global military conflicts, natural disasters, or public health emergencies. After the current pandemic recedes and the economy substantially recovers, policymakers should turn their attention to swiftly developing a strategy to change the long-term fiscal path. The sooner actions are taken, the less drastic the changes will need to be.

Effects of compounding interest. Persistently low interest rates have resulted in lower spending on net interest. However, due to the substantial size of the debt, GAO projects net interest will become the largest category of spending by 2050, growing from 1.6 percent of GDP in 2020 to 8.9 percent of GDP by 2050. The costs of debt vary based on interest rates, and increased rates can have a compounding effect on the debt. Spending on net interest was $345 billion in fiscal year 2020 and is projected to exceed $1 trillion in fiscal year 2033.

As a result, the U.S. has arrived at a critical point with the National Debt nearing its highest level as a share of the economy since World War II and climbing steadily upward.

The nonpartisan Congressional Budget Office (CBO) projects that under current law the debt will double as a share of the economy over the next 30 years, rising from 100 percent of GDP in 2021 to 200 percent in 2051.

The main drivers of the escalating U.S. National Debt are the nation’s aging population and rising health care costs, which translate into ever-rising spending for popular benefit programs such as Social Security and Medicare. Revenues are projected to rise as well, but not by enough to keep pace with spending.

Health care. Total health care spending (public and private) in the United States continues to grow faster than the economy and is driven both by an increase in the proportion of the population enrolled in Medicare and by the increase in health care spending per beneficiary. GAO projects federal spending on major health care programs to grow from 5.9 percent of GDP in fiscal year 2020 to 8.0 percent of GDP in fiscal year 2050.

Social Security. Demographic factors, such as longer lifespans, an aging population, and slower labor force growth, are straining Social Security programs and contributing to a gap between program costs and revenues. GAO projects spending on Social Security will grow from 5.2 percent of GDP in fiscal year 2020 to 6.1 percent of GDP in fiscal year 2050.

As the trustees of those two programs warned in their respective 2021 report, Social Security and Medicare both face long-term cash shortfalls under currently scheduled benefits and financing. Both programs will experience cost growth substantially in excess of GDP growth through the mid-2030s due to rapid population aging. Medicare also sees its share of GDP grow through the late 2070s due to projected increases in the volume and intensity of services provided.

Trustees’ warnings over several decades have been consistent, and yet inaction has turned what was once seen as a long-term problem into a much more immediate concern. The trustees project that the combined Social Security trust funds will be exhausted by 2034 and the Medicare Hospital Insurance trust fund will be exhausted by 2026, leaving little time to phase in changes that would prevent sudden benefit cuts, tax increases, or higher deficits.

Whether it’s the Social Security and Medicare trust funds or the overall federal budget, delay does not just burdened future generations, it actually increases that cost. According to a 2020 estimate by the Congressional Budget Office, the annual amount of deficit reduction needed to keep the debt at 100 percent of GDP in 2050 would rise from 2.9 percent of GDP to 4.8 percent if actions were delayed by 10 years.

America’s growing fiscal deficit and federal debt

Historically, spikes in debt are often correlated with major events such as wars and economic disruptions, such as a pandemic. Deficits went up during the crisis and came down when the crisis passed. We are witness to that dynamic now after the pandemic-induced recession.

Deficit reduction is a natural phenomenon of an economic recovery after a recession or economic downturn. However, deficit reduction would change the preexisting and long-standing imbalance between revenues and spending. Increasingly, episodic crises will simply add to a trajectory of debt that is already on an unsustainable path.

One thing is certain. New unexpected future challenges that will require extraordinary measures will arise that will occur and surprise future presidents. And some future challenges should not be surprises at all, such as a new pandemic or a climate crisis.

“We have not put ourselves in a stronger fiscal or economic position to deal with today’s unanticipated events by allowing old problems to fester, nor will we be in a stronger position in the future if we continue forward with our heads in the sand,” states Bixby.

America’s net debt currently stands at approximately 124% of nominal GDP (historically high and unprecedented). The debt level continues to get worse, but at an accelerated pace over the ensuing decades. We have time to fix it, but this problem will not age well, and the sooner we start to fix it, the better. If we don’t fix the growing federal deficit and ballooning federal debt, it will morph itself into a fiscal and debt beast we won’t like.

References:

1. https://thehill-com.cdn.ampproject.org/c/s/thehill.com/opinion/finance/596740-bidens-had-many-surprises-this-term-the-budget-crisis-isnt-one-of-them
2. https://www.gao.gov/assets/gao-21-275sp.pdf
3. https://www.thebalance.com/national-debt-by-year-compared-to-gdp-and-major-events-3306287

The Concord Coalition is a nationwide, non-partisan, grassroots organization advocating generationally responsible fiscal policy. The Coalition is dedicated to educating the public about the causes and consequences of large-and-growing federal budget deficits and national debt, the long-term challenges facing the economy and how to build a sound fiscal future for all generations.