Put More Money in Your Nest Egg
December 12, 2017
The face of retirement planning in America has undergone a radical shift over the past few decades. Time was when most Americans worked for companies that provided pension plans—retirement benefits that were guaranteed and funded completely by employers.
Starting in the 1970s, however, many companies began cutting back on pension benefits, and legislation created new types of retirement plans that placed the primary responsibility for retirement planning squarely on individuals, not employers. These types of plans—which include Individual Retirement Accounts (IRAs) and 401(k) plans—have become the bedrock retirement savings vehicles for most Americans today.
At the same time the future of Social Security, the retirement safety net that millions of Americans have relied on for generations, appears more uncertain than ever.
The practical implication of these trends is simple: If you want to ensure a financially comfortable retirement, you have to plan for it yourself—whether you work for an employer or are self-employed.
You can’t rely on an employer or the government to plan and fund your golden years.
Unfortunately, for most people there appears to be a wide gap between confidence in their current plans to retire comfortably and how much money they’ve actually saved. While six out of 10 Americans say they are confident they will have enough money to live comfortably in retirement, research by the Employee Benefits Research Institute indicates that half of all workers today have saved less than $50,000 for retirement.
Here are some steps you can take now to help make sure your finances don’t come up short when you’re ready to retire:
Start saving early
Experts agree that this is the single most important success factor when it comes to saving for retirement. Doing so enables you to benefit from compounding returns, a powerful tool that enables even small amounts of money to grow substantially over time.
The longer your investment time horizon, the more potential your savings and investments have to grow.
But if you get a late start saving for retirement, don’t despair. Play catch up by stashing away more retirement savings.
Establish an IRA or SEP-IRA
First established in 1975, IRAs remain a great retirement savings vehicle for many Americans. There are several different types:
- Traditional IRAs
- Roth IRAs
Traditional IRAs may provide an immediate tax deduction, depending on your adjusted gross income and whether or not you participate in an employer-sponsored retirement plan. Roth IRA contributions are not tax deductible, but those who qualify for a Roth may be able to withdraw the money tax-free after they reach age 59½.
Both types of IRAs enable you to benefit from tax-deferred growth over the long term.
Small-business owners and the self-employed should determine whether a Simplified Employee Pension (SEP) IRA might be the right savings vehicle.
Contribute to a 401(k) plan
You can contribute to an employer-sponsored 401(k) in addition to making IRA contributions, thus shifting your retirement savings into overdrive.
This especially makes sense if your employer matches your contributions—by kicking in 50 cents for each dollar you contribute, for example.
For self-employed individuals, there’s the Solo 401(k), which is similar to an employer-sponsored 401(k).
Set up an automatic investing program
You don’t miss money you never see. This is the idea behind automatic investing.
Here’s how it works: Each month, you arrange to have a specific amount of money automatically transferred from your checking or savings account directly into your retirement plan.
This may enable you to take advantage of a strategy known as dollar-cost averaging, which can reduce the risk of buying into the stock market at or near a peak. Instead, your investments are spread out evenly over time.
Make sure you’re diversified
Diversification refers to how your money is spread out among the three broad categories of investments: stocks, bonds and cash equivalents (like money market accounts and certificates of deposit).
No single type of investment performs well all the time, which is why a diversified portfolio is better able to ride out the inevitable ups and downs in the market.
Stocks and bonds, for example, usually have an inverse relationship: When the value of one is falling, the other is often rising, and vice versa. Meanwhile, cash equivalents are the safest of all three asset types, providing a level of stability for your portfolio regardless of market conditions.
Keep a long-term focus
It’s easy to get emotional watching the day-to-day market gyrations and reading the newspaper headlines. However, it’s critical to remember that retirement saving and investing is a long-term goal, and therefore you must keep a long-term perspective on the markets and your savings.
Most retirement savers and investors will benefit from what’s known as a buy-and-hold strategy. This means you build a diversified portfolio by purchasing quality investments on a regular basis over time. You then re-examine your portfolio periodically (such as once a year) and make slight adjustments as necessary to ensure that it’s still on track to meet your long-term objectives.
Estimate how much money you’ll need
Granted, it can be hard to anticipate how much money you may need to live on during retirement, especially if it’s 20 to 30 years away. One common rule of thumb is to plan on needing 70 percent to 80 percent of your pre-retirement income to meet your basic living expenses during retirement.
In making this determination, don’t forget to factor in the effects of inflation. The ongoing rise in the cost of basic goods and services erodes the purchasing power of your money over time. For example, $100,000 in 1989 dollars is worth only about $54,000 today, and the same hundred grand in 1979 dollars is worth less than a third (just $29,000) today.
Still, having a rough idea of how much you need in your nest egg will help you plan saving and investing strategies. And you’ll be able to gauge how well you’re doing at key milestones along the way.