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Retirement Resolutions To Help You Get On Track

27 January 2016 in Investing Insights

Key Takeaways

  • Take action with retirement planning sooner rather than later to help you live a more comfortable retirement.
  • Actions you can take include utilizing a retirement calculator, examining your monthly cash flow and preparing for plan B scenarios.
  • Maximize company matching if you have access to retirement benefits. Take advantage of tax friendly accounts and minimize fees.

The air is crisp, the bustle of the holidays is past, and you’ve got some extra bounce in your step with the arrival of a new year. Now is an excellent time to ask yourself if you’re making progress with your retirement savings. And if you’re not, it’s time to come up with a plan to get there.

Even if your retirement is decades away, don’t let that fool you into thinking it’s okay to procrastinate. A recent study by the Employee Benefit Research Institute found that less than 50 percent of workers have attempted to calculate how much money they are bound to need to live comfortably in retirement.1 Not being prepared for retirement can spell trouble.

The good news is that it isn’t too difficult to project how much you might need in retirement and if you’re making progress toward that goal.

Retirement Resolutions For A New Year

Here are several steps you can take right now to help improve your retirement savings goals and stay on track.

Utilize A Retirement Calculator. There are various online retirement calculators that utilize inputs such as how much you’ve saved so far, the approximate age you plan to retire, your investment risk preferences, your current income, and spending habits to provide a cash flow picture in retirement.

A retirement calculator could help you visualize how increasing your contributions can raise your chances for a comfortable retirement. Let’s take a look at an example with these inputs:

  • 35-year-old individual.
  • $50,000 annual income.
  • One year of salary saved.
  • Portfolio allocation with 80 percent stocks and 20 percent bonds.
  • Goal for retirement is to live off of 75 percent of pre-retirement salary using Social Security and drawing from retirement savings.

You can play around with your inputs to analyze different scenarios and compare the results. Experimenting can help you get motivated to save more. Here’s a look at how taking the above inputs and modifying your annual savings rate can yield varying outcomes.

Scenario A – Contributing 10 percent of salary each year is estimated to result in only a 56 percent chance of sustaining that income goal in retirement until age 95.

Scenario B – Contributing 12 percent of salary each year raises the likelihood to 64 percent.

Scenario C – The chances of achieving this retirement goal rises to 73 percent with a 15 percent annual savings rate.2

Examine Your Monthly Cash Flow. Overspending can become a dangerous habit that can eat away at your retirement savings. Take a look at your cash flow for the last three months and analyze where all of your money has been going. Chances are high there’s some fat to cut. Look for ways to optimize your cash flow such as creating automatic monthly sweeps into your 401k and investment accounts. Pay yourself first to ensure you’re saving enough based on your retirement calculator projections.

It’s also a good exercise to calculate the actual percentage of your income that you’ve been saving every paycheck. A good challenge is to save more than the amount you are paying in taxes per paycheck. Work to cut out unnecessary luxuries today in order to invest that money now, which has the potential to grow. It’s worth knowing that many financial advisors recommend saving at least 30 percent of your gross monthly income for retirement.3

Maximize Company Matching. How familiar are you with your employer’s retirement plan? Stop by your HR manager’s office and ask for the details of your retirement benefits. If you’re lucky enough to have an employer that offers matching, take full advantage of those perks this year. If you aren’t maximizing your company’s matching, you’re leaving free retirement money on the table.

Beyond the company match, ask if there is company profit sharing as well. A generous employer has the ability to contribute up to 25 percent of their operating profits per employee, up to a total employee + employer contribution of $53,000 in 2016, e.g. if an employee maxes out his 401k by contributing  $18,000 he can receive $35,000 in employer match and profit sharing. 4

Don’t Put All Your Eggs In One Basket. Everyone has his or her own unique investment style and risk preferences. However, putting all of your retirement savings into only one type of investment might not be the best approach. Consider having a mixture of stocks, ETFs, bonds, real estate, private investments and commodities covering domestic and international markets.

The closer you get to retirement, the more you should focus on protecting your capital and lowering your portfolio’s volatility. This can be achieved by increasing the percent allocation towards government or municipal bonds e.g., going from an 80/20 stock/bond allocation towards a 40/60 allocation slowly over the decades. One easy guideline to follow is to have the percentage in bonds equate to your age.

Think About Plan B Scenarios And Prepare. Even the most diligent planners can get caught by life’s curveballs. In a recent study by TD Ameritrade, roughly 66 percent of Americans claimed that their retirement plans have been disrupted by different life events.

Think About Plan B Scenarios And Prepare. Source: TD Ameritrade

Here’s a look at some of the reasons the participants’ retirement plans were negatively affected:

  • Loss of employment / Lower paid job (43 percent)
  • Planned family / Home (36 percent)
  • Poor investment / Business performance (28 percent)
  • Supporting others (24 percent)
  • Accident / Illness / Disability / Unable to work (19 percent)
  • Divorce / Separation / Widowed (18 percent)
  • Education (15 percent)

Some actions you can consider taking in order to avoid a stressful and unhappy retirement if a plan B event arises include lowering your expenses, using less credit, repaying debt, being more involved with your finances, talking about your finances with your spouse, and gaining more investing insights on how to grow your wealth.

Get The Lowdown On Social Security. If you haven’t already created an online account at http://socialsecurity.gov/myaccount, it’s a good idea to do so well before your 60s. Even if you plan on working for many more years to come, your online profile can provide you with a personalized estimate right now of how much you could receive in benefits when you’re ready to retire.

It’s also helpful to understand how the Social Security system works. Your eligible benefit amounts change based on your income during your career, your marital status, and the age you decide to retire and begin collecting payouts. There are many easy to follow tutorials and articles on the Social Security website to help you get familiar with the system well in advance.

Minimize Fees. Many investors overlook this beneficial behavior when it comes to their portfolios, however. Don’t let sneaky and expensive investment fees cost you a fortune. Try not to let fees compound. For example, if you’re paying a financial advisor 1 percent of your assets every year, who then puts your money in 1 percent expense ratio mutual funds, your overall performance may lag the broader markets.

Utilize Tax Advantageous Retirement Accounts. There’s no right or wrong way to save for retirement. But it’s important to use tax friendly accounts if you want to keep more money in your pocket over the short and long-term. Here’s a look at three different plan options outlined by the IRS.

Utilize Tax Advantageous Retirement Accounts. Source: IRS

Rebalance Regularly. If you’re unfamiliar with what rebalancing means take a minute to read about why it’s important to rebalance a portfolio over time. Investments shift all the time. Thus, your current investment allocation may have shifted rather significantly from your target asset allocation if you haven’t checked recently. Your asset allocation should shift as you age as well. Keep your financial goals well aligned with your risk tolerance as you get older. The general idea is to shift into a more conservative investment strategy over time.

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  1. Updegrave, Walter, “How To Get Your Retirement Savings On Track,” CNN Money, December 30, 2015.
  2. Ibid.
  3. Forbes Staff, “Ten Steps To Get Your Retirement Back On Track,” Forbes, 2015.
  4. IRS, “Retirement Topics – 401(k) And Profit-Sharing Plan Contribution Limits,” Internal Revenue Service, October 26, 2015.
  1. Derek
    5 Feb at 7:41 pm

    I opened a social security account online. Even though I won’t collect for decades, it’s nice to be able to view my account and get a rough idea of how much I could get.