Build-up Your Retirement Savings Now with help from the payroll tax holiday!

Update: On January 1, 2013, the payroll tax holiday ended and the Social Security withholdings tax went back up to 6.2%.

As 2012 opens, the media is filled with news of federal deficits, state budget cuts and unsettling predictions as to the economic future both here and abroad. On a more individual note, according to the Employment Benefit Research Institute (EBRI), more than 40% of Americans risk running out of money in retirement. Among the lower half of the income spectrum, more than a fifth will run out of money after 10 years. This particular scenario seems bleak enough, but when one considers people are living longer, retirement savings become even more important to ones long-term financial management.

Among the generally recommended strategies to address a paucity of retirement savings working longer, investing more effectively and saving more are the three tried and true methods to bolstering that retirement nest egg. Fortunately, 2011 offers most of us a unique and relatively painless way to save more toward retirement this year. As some of you may have already noticed, your first pay check of 2011 should reflect an increase in your net or take-home salary compared to last year. This increase is a result of the Federal tax negotiations agreed to by congress at the end of December 2010. In addition to extending the so-called Bush tax cuts through the end of 2012, the agreement also reduces the Social Security withholdings tax from 6.2% to 4.2% for the calendar year 2011.

It is worth noting, that the 2% reductions in the tax will be made up by the general fund, so the actual social security funding for 2011 is not affected by this change. This is a one year reduction in the Social Security tax and is scheduled to expire at the end of 2011. Many financial planning professionals have suggested that those of us fortunate enough to have access to a retirement savings account, use this 2% increase in income to bolster our retirement savings by increasing our retirement contribution by this 2%.

As a recent article in Motley fool says; "Since it's a one-year temporary tax cut, if you spend that money rather than invest it, you risk seeing it yanked away just as you get used to it. So why not put that cash where it would have gone anyway -- toward your retirement?"

Particularly for lower income people, many of whom have disabilities, this extra 2% in take-home pay is an excellent opportunity to boost ones retirement savings without really affecting ones actual income. Over time, these dollars can really add up and provide the difference between a comfortable retirement and just getting by.

For those of us without retirement savings, particularly younger people just starting out, this is an excellent opportunity to start saving and build a more secure financial future for ourselves and our families. The chart below vividly demonstrates how even small contributions to a retirement account, invested at various returns, can really add up over time.

Years to Go 10% 8% 6% 4%
Growth of a $100 Investment at Various Rates of Return
40 $4,525.93 $2,172.45 $1,028.57 $480.10
35 $2,810.24 $1,478.53 $768.61 $394.61
30 $1,744.94 $1,006.27 $574.35 $324.34
25 $1,083.47 $684.85 $429.19 $266.58
20 $672.75 $466.10 $320.71 $219.11
15 $417.72 $317.22 $239.66 $180.09
10 $259.37 $215.89 $179.08 $148.02
5 $161.05 $146.93 $133.82 $121.67

WID is not endorsing any particular individual investments, but increasing ones retirement savings is always an excellent asset building idea!

Even one year of extra savings, particularly early in ones career can add up over time.

Content contributed from The Motley Fool:Invest Your Tax Cut in Your Retirement by Chuck Saletta