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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 your own private plan. If you work for an employer who matches your contributions, the next step is make sure you capture all 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, even if you are well-read, 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 to invest in 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 expenses are deducted from performance. This doesn’t mean that expense should be the only criterion 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.
Important Disclosure:
Mike Bergen is a Partner, Managing Director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Asset allocation does not ensure profit or protect against loss. 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. Bonds are subject to market risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Consult your financial professional for guidance specific to your circumstances.
