One of the questions we are most frequently asked is, “What should I be doing to save for retirement?” The first step is to start contributing to your retirement plan, either through your employer or through you own private plan. If you work for an employer who matches your contributions, the next step is make sure you capture all of your employer’s matching dollars. For example, if your employer matches 50% up to 6%, your goal should be to save at least 6% of your salary in order to earn every dollar your employer is willing to contribute to your plan.
Once you have addressed these basic goals, you might want to move beyond the basic. Here are some ways that you can “supercharge” your retirement savings.
1. Invest in a Roth IRA or a Roth 401(k). With a Roth, you will pay taxes on your contributions. However, all Roth withdrawals made in retirement are tax free. This means that you will never pay taxes on the earnings of your Roth IRA or 401(k). This is a particularly beneficial arrangement if taxes are higher in the future. You will have paid taxes on the contributions at today’s lower rates, and all the earnings are tax free. A Roth is not subject to minimum distributions.
2. Get some advice. Studies show that investors think they know more than they actually do, but in any case, it never hurts to get a second opinion. Many employers and retirement plan sponsors offer free help online to assist you in setting up your account and determining how much you should save and which investment choices you should use. Some take it a step further and provide services that will actually manage and rebalance your account, often for a small fee. Another option is to use a fee-based planner to review your retirement plan choices and make recommendations for improvements.
3. Limit company stock holdings. Many companies have eliminated company stock as an option in retirement plans, but some still allow it. While your employer’s stock may be a great investment in your plan, it still makes sense to limit your exposure. Everyone has heard the horror stories of Enron or Lehman Brothers employees who had substantial account balances one day and woke up the next to find their account balance down by 90% or more. It may be appropriate to build the core of your retirement portfolio with broadly diversified investments and use things like company stock sparingly.
4. Don’t put the wrong things in your IRA. This is generally not a problem in employer plans, because they offer a set menu of investment choices. Some things are completely off-limits in an IRA, like collectibles, artwork, antiques, gems, stamps, coins and life insurance.
5. Pay close attention to fees. Most investment choices in an employer plan will have some level of internal fees or expenses. Selecting options with lower fees can help manage your investment results because internal fees and expense are deducted from performance. This doesn’t mean that expense should be the only criteria you use in selecting investment choices, but it is an important factor.
6. Track your progress quarterly. Retirement plans are long-term investment vehicles and there’s no need to check them daily. However, you should track your progress and make sure that the investment choices you’ve made are helping you work toward your goals. Each quarter you should check your mix of stocks, bonds and cash and consider rebalancing when the mix diverges 5% to 10% from your targets.
The most important thing to remember is to start saving for retirement as soon as you possibly can. One of the most important factors in retirement investing is time. Starting early gives you more time to accumulate assets and more time for those assets to work for you. As your account balance grows, tips like these can help you make the most of your nest egg.
To hear the podcast of the Smart Money Management radio show on this topic, or others, go to our website at alderferbergen.com.
All performance referenced is historical and is no guarantee of future results.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ? or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities and financial planning offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.