You're going to need savings in retirement to maintain your
lifestyle. The average couple receives around $35,000 annually from Social
Security, so most people require income from elsewhere to cover their basic
needs, healthcare, and fun. You can generally withdraw 3% to 4% of a retirement
account each year without running the risk of depleting it too early, so you
might require a fairly large number to supplement Social Security. However,
many people have little or no retirement savings, even into their 40s and 50s.
Consider these three strategies to set effective goals and
maximize your retirement savings plan.
Increased savings rate
This might sound simplistic, but the best way to increase
the amount of assets you'll accumulate in retirement is to save the right
portion of your income along the way. Saving 15% to 20% of income throughout
your working life should be enough to comfortably maintain your lifestyle in
your retirement years. That's hard to do even when things are going well – the
savings rate for Americans has been between 5% to 10% in recent decades. When
life gets in the way with unexpected expenses or losses of income, it's even
tougher to keep building retirement assets.
Luckily, there are a few strategies that can improve your
savings rate. Committing to a realistic, attainable budget and tracking monthly
expenses is a great way to ensure that you reserve a certain proportion of
income for retirement. There are several great apps for tracking and
visualizing expenses. Many people also find it helpful to dedicate a bank
account to wealth creation, separating those funds from dollars in checking
accounts that are utilized for regular expenses. If you can automatically
deposit a fraction of income in a wealth creation account, that's even better.
Finally, many people's savings are hampered by higher
monthly expenses from things like unnecessarily high debt. If you are paying
high interest rates, you should consider opportunities to refinance or
restructure debt. If you have an older mortgage, today's low-rate environment
might allow you to reduce monthly payments without incurring any additional
debt. If you're carrying high-interest credit card debt or personal loans, you
might be able to eliminate that debt by accessing the equity in your home. Reducing
interest payments can free up hundreds of dollars each month that can be
redirected to savings and retirement investments.
Retirement account catch-up contributions
If you're getting closer to retirement and hoping to make up
for lost time, you can take advantage of catch-up contribution provisions for
retirement accounts. People with 401(k), 403(b), or 457 plans who are over 50
years old can contribute an additional $6,500 annually. That's $52,000 a year
for a household with two income earners maxing out those limits.
Traditional IRA and Roth IRA accounts have a similar
provision that raises the limit from $6,000 to $7,000 annually. However, IRA
contributions are subject to income limitations. Roth eligibility is phased out
for individual filers exceeding $124,000 of adjusted gross income and $198,000
for married households filing jointly. Technically, there are no income limits
for traditional IRA contributions, but high income can eliminate the tax
deduction, which is the primary benefit delivered by those accounts.
Investing for responsible growth
If you're able to save the right amount, it's also crucial
that you invest those accumulated assets to balance growth and risk. Capital
sitting in the bank or misallocated to securities isn't doing enough work for
you.
Younger people with time to ride out temporary market
downturns should focus on growth. This doesn't mean taking on reckless amounts
of risk and making huge bets on individual companies, but you may want to
consider building a portfolio of stocks and ETFs that are relatively volatile
but likely to outpace the market over the long term. Stocks capitalizing on
disruptive tech and global megatrends, such as the expansion of the middle
class in emerging markets, are good places to find this upside. If you aren't
intending to sell out of your retirement investments any time soon, then
volatility can actually work in your favor. You can avoid selling in bear
markets and strategically identify times to move into lower volatility stocks
in the future.
If you're a bit closer to retirement, then seeking balance
is much more important. You may not have enough time to recover from a market
crash, and you never want to be in a position where you're forced to make
withdrawals during a bear market to meet your cash needs. In your 50s, it's
smart to start allocating more to bonds and defensive, dividend-paying stocks.
You can't move entirely away from growth, and at least half of your portfolio
should be spread among stocks in your 50s. Your approach just needs to limit
some of the downside risk.
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