Last week I wrote about some important 2021 updates for folks of a certain age who are taking distributions from their retirement accounts. But how about everyone else who’s still scratching and clawing to save enough to eventually retire?
There weren’t many twists and turns in recent Acts from Congress for those actively saving for retirement. Instead, most of the changes were aimed at people who lost their jobs or were (and maybe still are) impacted financially by the pandemic. Understandably, saving for retirement when you’re just trying to put food on the table is hard to do, if not impossible. For those lucky enough to be able to save, however, there are still critical numbers to be aware of in the year ahead.
Here’s a simplified list covering most situations.
The annual contribution maximum for Individual Retirement Accounts (IRA) is $6,000. Those 50 or older get an extra $1,000 of room for a total of $7,000.
Your income needs to be below a certain threshold to deduct Traditional IRA contributions on your tax return. These are listed below as ranges because deductibility phases out as your income goes higher.
Single individuals (and filing as such with the IRS) can make from $66,000 to $76,000 if they also contribute to a retirement plan at work.
Those who are married and filing jointly can make from $105,000 to $125,000 if they’re also participating in plans at work. If one spouse isn’t, the income threshold jumps to $198,000 to $208,000.
For contributing to Roth IRAs, it’s single filers at incomes from $125,000 to $140,000 and others who are married and filing jointly at $198,000 to $208,000. There’s no tax deduction for Roth contributions, so that’s why the thresholds are higher.
As a reminder, you can contribute to a Traditional IRA and a Roth for the same tax year, but it’s still the one annual maximum between the two.
401(k) plans are set up through your employer (or yourself if you’re self-employed) and have different maximums. For 2021, individuals can save up to $19,500 if they’re younger than age 50. Otherwise, you get an extra $6,500 of room to save. This doesn’t include any matching dollars received from your employer, so you could end up saving more after all’s said and done.
But what kind of investment outlook would you be saving into? I’m going to risk omitting important details to provide a brief rundown of where things stand right now with the markets.
Stock prices are elevated but performance across market sectors has been uneven. Certain tech and pharmaceutical stocks have been riding high for obvious reasons and you’ve likely heard about current market darlings like Tesla and even cryptocurrencies like Bitcoin. Those shares have been volatile while seeing their prices rise astronomically in recent months. Stories have been in the news about folks lucking into these huge runups and paying off their mortgage, buying lots of bling, and so forth. Another, GameStop, the gaming store, is currently in the news because it’s share price has risen almost 170% in the past week and over 2,000% since July!
There will always be these kinds of stocks and these sorts of stories. The characters are primarily short-term speculators in options and “short-sellers” who can lose almost as much as they gain, if not more. They typically play with borrowed money as well. Margin debt, or money borrowed against stocks to buy more stocks, is at extremely high levels. GameStop, for example, is riding the wave of borrowed money and options investors who cumulatively have way more “interest”, as it’s called, in the stock than is available to buy in the markets. This means that while some short-term traders can make a killing, most will lose their shirt. It’s like the childhood game of musical chairs except all the chairs can be pulled out at once. But this craziness isn’t impacting the whole market yet.
Instead of all this day-to-day craziness, be a long-term investor. It ain’t easy, however. The S&P 500, the major stock index seen as a proxy for the US market, is trading at about 31x the annual earnings of its average company. This is higher than the 20x long-term average, but not the highest ever. Part of what’s driving this high level is expectations for more relief money from Congress and continued support from the Federal Reserve. Don’t fight the Fed, as the saying goes. We could easily add Congress to that saying, at least in the near-term.
Households have also been savers during the pandemic, on average holding a record amount of cash per person by some estimates. We don’t live in the average, of course, and this number is probably skewed to the uber-wealthy who have been hoarding cash. The point is that there’s a lot of savings sitting around right now. This money, plus pent-up demand from nearly a year of pandemic life, plus more Government stimulus, will eventually enter the economy at some point. Hopefully this year but certainly by next. That’s what many investors are expecting, at least, and that’s the main reason prices are elevated right now.
There’s lots of risk to this outlook, however. Millions are still unemployed and many of those jobs won’t be coming back anytime soon. Millions are also delinquent on their rent and mortgage without the means of paying it all back. And the nation is now vaccinating about 1 million people per day over the past week, but it could be many months before all who want to be vaccinated are. The psychological impacts of all this, both positive and negative, will continue to play out in the economy for some time.
Could investors be getting ahead of themselves in their rosy outlook for corporate earnings? Certainly. Is there likely to be volatility this year as plans for more government spending run into opposition and inevitable issues arise with vaccine distribution? You bet. Will there be one or more unanticipated shocks to the system this year? Plan on it. Will short-term trading equal long-term wealth accumulation for many of the folks playing in the markets right now? Probably not.
So, with that dose of realism, as you look ahead to saving for retirement remind yourself that the real money in investing is made over the long term. Your regular contributions, dividends earned, and compounding will work with the highs and lows of the markets over time. As the saying goes, it’s time in the markets and not timing the markets that makes for successful investing.
Have questions? Ask me. I can help.