The time to get smart about retirement planning is now
10 tips and strategies to make the most of your financial future
One of the most important thing to know about planning for and investing in a comfortable retirement is that it’s never too late to start.
Regardless of your income, setting a goal and developing a well-rounded retirement strategy now can put you on solid financial footing for the future. Getting informed, having a plan, and building a portfolio that makes sense for your specific needs provides you with peace of mind, even during times of uncertainty and financial strain.
Working with a financial professional can help you understand your time horizon and make the most of your savings. Evaluating your financial outlook and taking action in working toward your investment goals will get you into a growth mindset now, and for the long haul.
Here are 10 tips and strategies to consider to help you become more proactive about planning your retirement.
1. Assess your risk tolerance in relation to your investment goals
Knowing yourself is key to building a retirement savings strategy you can live with. Working with a financial advisor is a great way to get help in making an honest self-appraisal for how comfortable you’ll be riding the inevitable ups and downs of financial markets, as well as the unexpected windfalls and emergencies of life.
When thinking about how much investment risk you’re willing to bear, strike a balance between being practical and flexible. Knowing whether you’re an adventurous optimist or a conservative who prefers a slow and steady path toward accumulating wealth will help you make decisions you can be happy with during and beyond your income-earning years.
2. Determine retirement expenses and spending needs
Getting real about what your retirement will cost can be stressful, but it’s an essential first step toward reaching your savings and investment goals. Some experts recommend replacing as much as 80% of your income with your savings after retirement, so it’s important to know exactly what you’re earning and spending before you can prepare for retirement.
While some might associate “budgeting” with deprivation, the exercise of identifying your essential, fixed, and variable expenses is an opportunity to take control of your finances. Think of your retirement budget as a way of making sure you have the funding to support the lifestyle you actually want in your golden years.
3. Benefit from getting older
Aging comes with many financial perks, including senior discounts, tax deductions, larger retirement account limits, and Social Security payments. But perhaps the greatest benefit to your retirement planning comes from the power of compounding interest, which helps you exponentially grow your wealth.
Even just a few extra years of retirement saving and investing can have a huge impact on your retirement, because you’re essentially earning interest on your interest. The longer your money compounds interest, the more money you’ll have to broaden your portfolio and expand your investment assets.
4. Automate your savings
Because your financial priorities change as you progress from saving for retirement to generating income from your retirement savings, you’ll want to make sure you have a routine for making consistent deposits now.
A great rule of thumb as you’re allocating your savings between immediate needs, emergency funds, and retirement income is to “pay yourself first.” Figure out a weekly or monthly amount of money that you can set aside for the future, and set up an automatic transfer to your retirement savings so you’re never tempted toward immediate gratification.
5. Maximize tax-advantaged savings options
The best way to effortlessly redirect money from your paycheck toward your retirement savings and investments is by learning to take advantage of every opportunity to contribute to tax-advantaged savings accounts. These include 401(k)s, IRAs, HSAs and any type of investment, financial account, or savings plan that is either exempt from taxation, tax-deferred, or that offers other types of tax benefits.
If your 401(k) is through your employer, you’ll also want to take full advantage of matching benefits, by regularly contributing as much as you possibly can, up to the IRS limit. (And if you happen to get a raise or a bonus, why not deposit that directly toward your retirement plan, instead of spending it? That way it will grow instead of disappear.)
6. Beware retirement fund fees
Unfortunately, hidden fees can undermine even the smartest retirement savings strategies, so make sure you read the fine print when it comes to selecting mutual fund investments and financial advisors. The good news is that the cost of investing in retirement plans has dropped considerably over the years, and fee disclosures are now legally mandated.
Still, it’s worth paying close attention so that you won’t be surprised by expenses like one-off costs, distribution fees, check fees, ongoing yearly fees, and management fees. Also keep a close eye on “expense ratios,” which can be steep when calculated as a percentage of your total assets.
7. Consider an annuity
Annuities are a type of insurance that pay out a fixed sum every year, which can be a great way to provide yourself with consistent income during retirement. However, commissions charged by those who sell annuities can be prohibitively high, and fees for underwriting and management of the annuity itself can take a significant chunk out of potential returns.
While annuities can be particularly attractive to investors who don’t feel comfortable or care to manage their own investments, they also are vulnerable to stock market volatility, which makes them less certain than other retirement investment vehicles.
8. Stay on top of estate planning
Regardless of your net worth, it’s important to have an estate plan in place, so you can decide how you want your assets distributed in the event you die or become unable to make your own financial decisions.
Estate planning typically varies over an investor’s lifetime, and might require assistance from different professionals at different times, including lawyers, accountants, tax attorneys, and financial advisors. Goals of your estate plan can include planning for taxes, guardianship, trusts, powers of attorney, living and last wills, and perhaps most importantly of all, avoiding probate.
9. Don’t exit stocks too soon
Warnings against trying to time the stock market are as old as time itself. However, staying the course with a diversified and regularly updated portfolio – even in the face of market volatility – can pay meaningful dividends upon retirement. If you must make withdrawals when the market is down, know that you could lose some ability gain upsides in the future, which could put a dent in your overall income later on.
As we grow older, it’s often tempting to lean toward a more conservative investment strategy. But, given the reality that people are generally living much longer, avoiding the temptation to cash out can help cover many more years – if not decades – of living well during retirement.
10. Develop a retirement plan withdrawal strategy
Once you’ve worked hard and invested wisely, it’s time to turn your attention to a sound exit strategy for your retirement funds. Outliving your money is a common retirement fear, but smart retirement planning can help you extend your nest egg when you need it most.
Working with a professional to assess your needs, across various retirement income sources and tax implications, can help you have a more comfortable retirement. Financial advisors can help you choose from the 4% rule, or from among fixed-dollar or total-return strategies, to help you align with your long-term needs and goals.
The bottom line is that retirement plans necessarily evolve through the years. Working with a trusted advisor can offer full transparency across all of your finances, so you can focus on building a flexible portfolio that can be updated regularly to reflect changing economic conditions as well as your specific retirement objectives.