5 Small Changes That Can Make a Big Difference to Your Retirement Plan
It can be overwhelming to think about retirement—and if you’re worried you’re not doing enough for your retirement plan, you’re not alone. According to a survey by TD Ameritrade, most Americans would give themselves a C grade or lower if asked how well they’re preparing for retirement.
General advice may lead you to believe that you’ll need several million dollars by the time you’re age 65—and you might think you need a perfect investment strategy and willpower of steel to pull that off.
But thankfully, this isn’t necessarily the case. You don’t have to be perfect to prepare for retirement, and unless you are very behind on saving, you probably won’t have to radically change your lifestyle either. There are many small steps you can start taking today that can snowball into wins later on. Let’s take a look at a few of them below.
1. Open an Investment Account
First things first: If you don’t have one already, take the leap now and open an investment account. If your employer offers a 401(k) plan, take advantage of that, especially if they provide matching contributions. If you don’t have an employer-provided plan, a traditional or Roth IRA may be for you.
Self-employed individuals, such as entrepreneurs and small business owners, have options too, like the solo 401(k), SEP IRA, or SIMPLE IRA. Consider talking with a fiduciary financial advisor to determine which plan would benefit your situation and retirement goals.
It doesn’t take long to set up a retirement account of your choosing. Once you have one, it’s a simple matter to schedule automatic contributions. Different retirement accounts have different contribution limits that you will want to be aware of.
The earlier you start saving, the better. If you are starting late, you will want to save more to catch up. Online retirement calculators can give you a general estimate in determining if your account balances are on track. Or you can talk to a financial advisor with expertise in retirement planning who can provide more specific numbers and personalized advice.
2. Limit Your Fees
When you set up your retirement accounts, keep fees and expenses in mind. Avoiding unnecessary fees means you’ll have more money to put toward retirement. You can save by:
Selecting a low-cost index fund that is passively managed, mirrors the major stock indexes, and charges low (or no) fees
Selecting a fee-only investment manager who emphasizes low costs, tax efficiency, and diversification in portfolio design
Outside of investing, making sure you have free checking accounts and high-yield savings accounts (which give you more money to devote to retirement savings)
3. Take Advantage of Extra Cash
If you get a bonus at work, a salary increase, a tax refund, or an inheritance, your first instinct might be to spend that extra cash now.
But this windfall provides an opportunity to bolster your retirement savings. Whenever you get extra money, make it a habit to invest at least some of it. As soon as that money lands in your account, immediately move part of it to your savings or retirement account. Out of sight, out of mind, as they say.
4. Gradually Increase Your Contributions
Thanks to the power of compounding, even a tiny increase in your contributions can show significant returns down the road. From The Motley Fool:
“Say you’re 30 years old, earn $60,000 a year, and currently contribute 5% of your salary, or $3,000, to a 401(k). Let’s also assume that you intend to continue contributing 5% of your salary for the remainder of your career, and your salary increases 3% each year. If your 401(k) generates a 6% return (which is actually well below the stock market’s average), then you’ll have about $502,000 saved up by age 65—certainly a respectable balance. But let’s say you find a way to contribute 6% of your salary each year instead of just 5%. Using our same assumptions, by age 65, you’ll have a balance of $602,000—$100,000 more than what a 5% contribution would’ve made you.”
Consider how much more you can save by continuing that pattern yearly. If you make it a goal to notch up your contributions by 1% each year, that small annual increase can help provide the long-term returns you need to achieve your retirement goals.
5. Think Long-Term
If you are anxious about saving enough for retirement, you may feel tempted to time the market by buying and selling stocks strategically for maximum gains. But this method can lead to headaches and heartaches. Market timing simply does not work as a retirement strategy. It can be less stressful and more lucrative to let your investments compound without micromanaging them.
Trying to time the market can lead to emotional, unwise decisions—and a lower investment yield than the market as a whole, according to a DALBAR report. Buying and selling shares within a year can also lead to higher taxes on those capital gains.
Rather than trying to play the market, you’d be better off working with a fee-only financial advisor or, if you’re a do-it-yourselfer, investing in an index fund that mirrors the market as a whole.
Our Greenwood Village, Colorado financial planning firm builds long-term investment strategies and portfolios based on our clients’ individual situations, concerns, and retirement goals. If you decide to work with a financial planner, we recommend you seek one who is a fiduciary and doesn’t receive commissions so that the advice you receive is in your best interests.
Keep Your Eyes on the Prize—Retirement
Retirement planning comes down to the details, and the above steps can help you get on course for retirement.
Keep your sights set on your future retirement, hold steady, and make the small steps now that can blossom into gains later.
Discuss your situation with a fee-only financial advisor. Schedule a complimentary discovery call.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
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