It's no secret that it's hard to plan for retirement. In
addition to growing a sizeable nest egg, you must protect it from external
factors like market volatility, inflation, and unforeseen expenses. And, to be
brutally honest, that's been tough as of late.
Northwestern Mutual's 2022 Planning & Progress Study
shows that personal savings are down 15% from $73,100 in 2021 to $62,086 in
2022. Moreover, 60% of American adults say the pandemic is "highly disruptive"
to their finances.
In the midst of the pandemic, though, Americans saved around
$2.5 trillion. Unfortunately, those cash reserves are drying up as people use
them to deal with 40-year-high inflation. According to a Forbes Advisor survey,
two-thirds of Americans are raiding their savings because goods and services
are so darn expensive.
That said, planning to retire comfortably means securing
your savings and assets. While that can be overwhelming initially, here are the
10 easiest ways to protect your retirement money.
1. Develop a financial forecast for retirement.
Calculating how much cash you'll need for each year of
retirement can help you save a bigger-than-expected nest egg. "Nowadays,
if you retire at 65, you should have a financial plan for 20 years,"
Tenpao Lee, a professor of economics at Niagara University in New York, told
U.S. News.
Because your funds will need to last through these decades,
you may want to consider 401(k) and IRA withdrawals as your new paycheck. Those
amounts, plus your Social Security benefits, can cover your daily expenses.
Developing a retirement budget can prevent you from
overspending, incurring debt, or exhausting your savings.
2. Make use of your retirement savings to bridge the
Social Security gap.
"Use your retirement savings to fund a Social Security
bridge strategy, advises Steve Vernon, president of Rest-of-Life
Communications. "Doing so can significantly increase the amount of Social
Security income you'll receive over your lifetime by enabling you to delay the
start of your benefits as long as you can." However, delaying further than
70 doesn't offer any benefits.
You can also bolster your retirement income with a Social
Security bridge plan. How? Vernon explains that you can convert easily
accessible savings –a target for fraudsters- into a guaranteed income stream
from the government.
3. Diversify your retirement portfolio.
As the adage goes, don't put all your eggs in one basket.
Make sure you're spreading your investments out between stocks and bonds. You
should also take your risk tolerance into account when choosing your
investments.
More specifically, your retirement portfolio should contain
high-yielding bonds and dividend-paying stocks.
It is generally recommended that your investments should
become less risky the closer you get to retirement. You can spread out the risk
by investing in different things, which will give you a more stable allocation
of your assets.
Also, look for other ways to make money besides bonds and
stocks. Many people seek additional income streams and new opportunities even
in retirement. Examples include freelancing, working from home, and passive
income sources like rental properties.
4. Choose your asset mix carefully.
"It's essential to think about your asset mix, which
simply means the different types of investments that go into your portfolio,"
recommends Jordan Bishop in a previous Due article. "For example,
investing in stocks may help you grow your retirement fund faster, but if they
drop substantially, you could also see plenty of losses."
That's why you've got to choose your assets carefully. Also,
ensure that your portfolio includes a combination of investments.
How can you choose the right assets?
First, invest in stocks when you're young.
"When deciding how to allocate your funds, a general
rule of thumb is that the younger you are, the more you can invest in
stocks," adds Jordan. Since stocks offer much higher returns than other
assets, they have always tended to rise in value. But, if there are any losses,
you have time to recoup.
Secondly, choose safer investments as you get older.
"Investing in low-cost index funds will provide you
with an average return without taking on too much risk," Jordan states.
"But if you really want to reduce risk as much as possible, investing in
bonds or bond funds rather than stocks or stock funds is the way to go."
5. Keep some cash on hand.
Almost all financial planners say you should hold on to at
least some stocks in order to avoid outliving your assets. However, retirees
need to be more careful with their investments. Unlike younger investors, they
don't have long time horizons.
Professionals say you should keep five years' worth of
expenses in cash as a safeguard. Lucky, those with that kind of cash have had
enough extra to work toward a goal like that. Alternatively, you may use cash
equivalents, such as short-term bonds, certificates of deposit, and Treasury
bills.
You should be able to keep most of your expenses stable once
you retire. But that doesn't mean you're free from the unexpected.
For example, how would you cover a home repair or medical
emergency? Working overtime is no longer an option. So, will you use a credit
card or tap into your savings? Moreover, if market conditions temporarily cause
your investments to fall, you should not withdraw money from them.
If you're worried that inflation will grow and erode your
purchasing power, consider holding some "cash equivalents." These
typically take the form of Treasury Inflation-Protected Securities.
TIPs have a fixed interest rate, but their par value
increases with changes in the Consumer Price Index. In other words, if
inflation hits 5%, your investment will grow too. With a TIPS, the inflation
adjustment component keeps the principal's purchasing power intact. However,
you'll lose inflation adjustment money if we enter a period of deflation after
buying TIPS.
6. Prepare yourself for inflation.
Speaking of inflation, the cost of living rose by the most
in 4 decades in 2022. And, suffice to say, a lot of us are struggling.
"Nearly half of Americans (45%) polled by Gallup last
year admitted inflation caused financial hardship at a time when the CPI was
just 6.8%," writes Pierre Raymond in a Due article. "Moreover, of
those that reported facing difficulties, 10% revealed their challenges impacted
their standard of living."
"While the Federal Reserve claims inflation's bubble
will pop soon, experts anticipate the CPI won't fall below 4% by the year's
end," he adds. "That means you can expect another year of high
inflation bumping up prices."
Updating your budget with inflation in mind.
There is, however, a silver lining. You can use the
following techniques to stop inflation from deflating your savings.
Make a list of priorities. This shows the bare
minimum you need every month to cover your essentials. It's a good reminder of
what you need to pay first.
Cut discretionary expenses. Whatever items didn't
make it on your list of priorities should be placed on the chopping block.
Automate savings. Ideally, you want to have 3 to 6
months of expenses in your emergency fund.
Tweak your phone and internet package. Consider downsizing
your unlimited plan to a plan with strict data and talk limits.
Update your insurance. Compare plans or negotiate a
better rate with your current provider.
Eat better for less. Plan your meals based on weekly
flyers and coupons.
Use less energy. You can reduce energy consumption by
keeping your AC at 78°F when you're at home. During the winter, keep the heat
at 68°F while you're at home.
Reduce your fueling costs. Consider downloading an
app like GasBuddy or carpooling.
Learn how to negotiate. Contact your credit card
company to negotiate a more favorable interest rate.
Investigate financial assistance. Contact a free
credit counseling organization for financial advice.
7. Don't overlook healthcare and long-term expenses.
According to a Fidelity Retiree Health Care Cost Estimate in
2022, a retired couple would need around $315,000 saved (after tax) to cover
health care expenses in retirement. However, with people more likely to live
longer, they will need to pay even more down the road. So, keep that in mind
when constructing your retirement plan.
And, to make matters worse, this figure does not include
long-term care (LTC) costs. You might want to set aside a separate fund for
long-term care costs to secure your retirement income. Additionally, you should
consider long-term care insurance. This could help protect seniors over 65 who
may suffer from disabilities, chronic conditions, need nursing care, and home
health care.
Also, if you have an annuity, ensure you attach a long-term
care rider to cover these expenses. There are also stand-alone LTC annuities if
you're interested.
8. Have a plan for taxes.
Individuals don't always understand how taxes can impact
their retirement savings and assets. Capital gains, inheritances, and estate
taxes can heavily reduce your retirement fund. In turn, this reduces your
savings.
That's why, when planning for retirement, consider all the
taxes that your savings, assets, and income may be subject to today and
tomorrow. Consulting a financial advisor for direction is also strongly
recommended.
9. Rethink target-date funds.
Target date funds provide an investment mix of stocks,
bonds, and cash based on the age you plan to retire. As you approach
retirement, the fund will automatically adjust its mix to become more
conservative.
However, some people use them wrong, says Mike Gray, a
CAPTRUST financial advisor.
Suppose they plan to retire in 2045. Instead of purchasing a
fund for the year, they put a little bit of money into a fund for the year
2030. Why? They think that'll be safer. Following that, they put some money in
a 2060 target-date fund, which is more aggressive.
"The combination of those choices may not be as
effective as choosing the single right target-date fund. So you need to put it
in one fund based on your planned retirement age and stick with it," he
says.
But, that's not the only problem with target-date funds.
One-size will never fit all. The one-size-fits-all
approach, relying simply on a date, can cause inappropriate asset allocation.
The funds invest in themselves. Most target-date
funds invest mainly in other funds managed by the same company. Ignoring the
conflict of interest, for now, limiting investment options can hurt returns.
Fees. Because they invest in other funds, target-date
funds charge multiple fees.
Most investors can do better. But, unfortunately, despite
target-date funds' good premise – growing wealth during the first years of a
career and protecting it later – for many investors, they won't deliver on
their promise.
10. Avoid excessive withdrawals.
Your retirement income can be at risk if you spend your
funds too fast. As such, it is prudent to withdraw your funds slowly toward the
end of your working life. Furthermore, it's essential to know that 401(k)s,
traditional IRAs, and even Roth IRAs have different rules, taxes, and
withdrawal rates.
These rates and taxes can severely eat away at your
retirement savings if you don't take measures to minimize them. Because of
that, it's a good idea to be mindful of them and plan withdrawals accordingly.
In short, you may derail your retirement planning if you
withdraw too much from your retirement account.
11. Buy an annuity.
When facing an income-expense gap, consider an annuity.
Annuities provide lifelong guaranteed income. You can therefore manage your
money throughout retirement more effectively.
When you buy an annuity, you sign a contract with an
insurance company. This company assumes the risk of a series of payments over
the years in return for a lump-sum investment. However, some annuities can be
purchased over a series of payments.
Although you can specify an exact timeframe — like for 20
years — you'll receive monthly payments for the rest of your life. With a fixed
annuity, you'll also know what you'll be getting. For instance, with Due, you
get 3% on your money — no matter what.
At the same time, it's often suggested that you wait on an
annuity until you've maxed out your other retirement accounts.
Frequently Asked Questions
How much money do I need to retire?
There are several factors that determine the amount you
need. It depends on your age at retirement, how long you live, and how much
money you get from pensions or Social Security. If your spending needs are more
than your retirement income, you'll have to take withdrawals from your
retirement fund to fill the gap.
The most important factors are how much you're withdrawing,
for how long, and any earnings or losses on your savings.
How much can I contribute to a retirement account?
Contribution limits for retirement accounts are often
increased annually. For example, a person's contribution limit to a qualified
individual retirement account (IRA) in 2022 will be $6,000 ($7,000 if you are
50 or older). Individuals can contribute up to $20,500 to a traditional 401(k)
in 2022. People over 50 can make a catch-up contribution of $6,500 per year —
making their total $27,000.
There are no contributions with annuities.
What happens if I take money out of my retirement account
early?
When it comes to retirement accounts, you can't withdraw
money until you're age 59 ½. The early withdrawal penalty is 10%, plus any
taxes due.
Are there taxes on retirement account withdrawals?
In most cases, yes.
Taxes are deferred on IRAs and 401(k)s. This means you put
money into the account before taxes and could deduct it in the year you funded
it. Therefore, you'll be taxed on withdrawals in retirement at your current tax
rate. On the other hand, Roth IRAs are tax-free because they're funded with
after-tax money.
What is the best way to invest my retirement savings?
It's crucial to avoid significant losses in your early
retirement years (and years leading up to it). If you withdraw money with a low
balance, you'll run out of money sooner than expected. But that doesn't mean
you shouldn't risk it at all.
Your retirement will hopefully last a long time. However,
prices will rise over time, and your account balances may need to grow to keep
up with inflation and fund a lifetime of income. Unfortunately, you might not
produce enough if you put your money into low-yielding safe investments.
It's hard to find that balance. And it's easy to get fooled
by too-good-to-be-true investments. But on the other hand, many people can fund
a comfortable retirement with a diversified mix of low-cost mutual funds or
exchange-traded funds.
Ultimately, you must figure out how to spread your money
among these investments. And depends on your risk tolerance and financial
situation.
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