Retirement Planning Inertia? Ten Tips to Help You Achieve Your Retirement Resolutions This Year
The end of the year is often a good time to reflect on what you’ve accomplished throughout the year along with what you might resolve to do better in the new year. But when it comes to saving for retirement, for many people the prospect of saving enough to comfortably retire can be overwhelming. Afraid that they may never reach their financial goal, inertia seems the preferable course of action compared to taking the steps necessary to make a positive change. In reality, small actions can often lead to big results. The start of a new year is the perfect time to get started. Here are ten tips to help you get on track toward achieving your retirement resolutions this year.
- Set a date.
No matter how old you are, think about a realistic retirement date based on where you are at right now. This “date” doesn’t have to be set in stone and may change over time, but you have to start somewhere. Evaluate and determine an intended retirement timeframe, based upon where you are right now and how long you expect to work.
- Do the math.
There are many online retirement income calculators available today—often through your existing retirement plan provider. What is important to realize is that the exercise of calculating a retirement savings goal does more than simply provide you with a dollars and cents estimate of how much you will need for the future. It also requires you to visualize the specific details of your desired retirement lifestyle. Before you do anything else, answer these important questions:
- When do you plan to retire?
- How much money will you need each year?
- Where and when do you plan to get your retirement income?
- Are your investment expectations in line with the performance potential of the investments you own?
- Which expenses will change in retirement? Which will stay the same?
Yes, sometimes the results can be scary and might seem unattainable, but it’s a worthwhile exercise and the first step in truly developing a retirement savings and investment strategy.
- Start saving as early as you can.
The reason is simple: The money you invest now for your retirement will grow over time thanks to compounding interest. Compounding is what happens when you earn money not just on contributions to your account, but also on the earnings themselves. It’s interest on interest, and that means your savings grow faster. Take advantage of compounding by starting to save as early as you can. People who started saving for retirement in their 20s are 66% more likely to expect retiring by age 60 than those who started in their 30s, according to a recent study from Money Rates. And, even if you only have ten years to retirement, it’s never too late to let compounding work its magic.
- Save as much as you realistically can.
Analyze your current expenses – both fixed and variable—to see where you can save more, because small savings really do add up. To provide a real-life example of this, if we estimate that a gourmet cup of coffee costs $5, and you make this purchase five days a week over an average of 260 work days a year, that adds to $1,300 a year. Now multiply that number by 40 years of active work, and you have spent $52,000 in constant dollars; assuming a 6 percent compound annual growth rate, that number comes to a total of $152,000. That’s a lot of money spent on coffee that you could have saved for retirement!
- Increase your 401(k) savings rate every time you get a pay raise.
Remember the old adage, you won’t miss it if you never had it? Making tax-deferred contributions is one of the best ways to save. Pretax salary deferrals reduce current taxes as they are not included in your current taxable income. The same is true of the investment earnings your deferrals generate. As your rate of pay increases, so should your contributions to your retirement savings plan, if possible. If you are currently putting 5% of your salary into a retirement savings plan, consider increasing to 6% or 7%; if you are at the 6% level, consider 7% or 8%. A lot of workers receive salary increases at the end of the calendar year; this is often the perfect time for taking some of that increase and putting it directly into your retirement savings plan.
- Play catch up.
Take advantage of Catch-up Contributions that allow you to contribute even more to your 401(k) account if you are over the age of 50 or older. Catch-up contributions are contributions over and above the regular contribution limit for those age 50 or older. If possible, take the opportunity to give your retirement savings a boost.
- Review your portfolio regularly.
Asset allocation decisions are among the most important that you can make. Remember to rebalance your account periodically so that you don’t stray too far from your asset allocation goal.
- Do not put all of your eggs in one basket.
With retirement assets, diversification is key. Speculating on large returns by relying on one type of investment can be a major mistake that can be easily avoided by diversifying the holdings in your retirement savings account.
- Know your risk tolerance.
Every investment has some level of risk associated with it. While no one wants to take unnecessary risks with his or her money, keep inflation risk in mind as well. Time is a key factor in determining how much risk you can comfortably take and choosing investments that best meet your long or short term goals. To reduce one type of risk, you will generally have to take more of another. As you make investment decisions, keep in mind that your ability to accept risk will probably change as the years pass.
- Plan with your partner.
If you are married, relying only on one partner’s retirement savings to support you both can be another mistake. Plan jointly with your spouse to get the maximum advantage from both of your retirement plans. Talk with your partner about all the available resources and plan together accordingly.
Once you have your retirement strategy in place, be proactive about your plan—don’t put it on auto-pilot. Retirement planning is more important than ever before as people are living longer and having to support themselves for a longer time period after retirement. While saving requires sacrifice, focus on the rewards by visualizing the retirement that you want. Taking that first step can be the hardest, but once you have a game plan, your odds of retiring comfortably can only increase.
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About the Author
Richard W. Rausser has more than 25 years of experience in the retirement benefits field. He is Senior Vice President of Client Services at Pentegra, a leading provider of retirement plan, fiduciary outsourcing and institutional investment services to organizations nationwide, founded by the Federal Home Loan Bank System in 1943. Rausser oversees the consulting, marketing and communications, BOLI, compliance and actuarial service practice groups at Pentegra. He is a frequent speaker on retirement benefit topics; a Certified Pension Consultant (CPC); a Qualified Pension Administrator (QPA); a Qualified 401(k) Administrator (QKA); and a member of the American Society of Pension Professionals and Actuaries (ASPPA). He holds an M.B.A. in Finance from Fairleigh Dickinson University and a B.A. in Economics and Business Administration from Ursinus College.