9 Ways to Retire Richer
Saving Strategies 1-4
Are you saving enough for retirement? Is your money invested wisely? If you're like most people, the answers are probably no and no. But to have the kind of comfortable retirement you want -- with the same standard of living you now enjoy along with travel and visits to the grandkids built in -- you have to set aside a lot of money during your working years and have something better than a pin-the-tail-on-the-donkey strategy for making it grow. We know: Socking a hefty chunk of your salary into a 401(k) or IRA isn't easy, especially in this economy. But make no mistake, what you put away now -- and how carefully you manage it -- will determine whether you can lead the good life after your working years are done. These nine simple steps can help you get your retirement planning on track.
1. Max out your retirement contributions.
After the stock market dive of 2008, it's clear that throwing 4 or 5 percent of your annual income into a 401(k) or IRA and hoping for big annual returns isn't going to cut it. "You're much better off contributing more and investing it less riskily," says Dallas Salisbury, president and CEO of the Employee Benefit Research Institute, a nonprofit agency in Washington, D.C.
Simple Rule of Thumb: Try to contribute 15 percent of your take-home pay. That's a ton of money to pull out of your monthly budget, but remember that 401(k) contributions are pretax and those to your IRA are tax-deductible, so every dollar you put away would really only cost you about 75 cents. Every bit counts. If you can up your contribution level only 1 percentage point this year -- say, from 9 to 10 percent -- do it. Try to up it to 11 percent next year and so on. Just be aware that the 15 percent benchmark assumes you started contributing in your 20s. "You need to add 5 percent for every decade you've delayed to make up for lost time," says Salisbury. So if you didn't start contributing until you were in your 30s, your goal should be to contribute 20 percent of your salary; if you waited until you were in your 40s, make it 25 percent.
2. Spread your money around.
To safeguard against market downturns and to turn the best long-term profit, you need to diversify your portfolio. You want investments in U.S. and international companies, small start-ups and big established corporations, bonds and Treasuries, and all the various sectors of the economy, says Thomas Collimore, director of investor education for the Chartered Financial Analyst Institute. Buy mutual funds and forget about buying individual stocks.
Simple Rule of Thumb: Let the professionals do the work. In a company-sponsored 401(k) plan, the core menu of mutual fund options is designed to provide a diverse array of investments. For an IRA or any account you manage yourself, call an independent financial planner for help creating a smart mix.
3. Pick the right amount of risk.
The big stock market gains of the late '90s enticed many of us into aggressive portfolios. Why mess with slow and steady bond and Treasury fund returns when stock funds could see 6 to 10 percent annual growth? However, as we all learned, those returns can quickly undo themselves. If you're 30 and your career is ahead of you, you can wait for the market to rebound. But if a downturn happens when you're in your 50s or 60s it can devastate an aggressively invested nest egg. So every few years, make your portfolio more conservative.
Simple Rule of Thumb: Keep the percentage of your nest egg in bonds roughly equal to your age. So at age 30, put 30 percent of your account in bond funds and 70 in stock funds; when you're 55, make the split 55/45.
4. Set up automatic rebalancing.
You've maxed out your salary contributions and chosen a good mix of mutual funds, so now you can sit back and let the money grow, right? Wrong. You need to keep your portfolio balanced. Some funds in your portfolio will outperform or underperform others. As a result, the percentages invested in each will no longer match the allocation you set up, putting you at greater risk for a loss or for missing out on a gain. So at least annually you need to log on and rebalance your money to your originally intended proportions.
Simple Rule of Thumb: Ask whether your retirement account offers an automatic rebalancing program, says Salisbury. This free and widely available computerized service reallocates your money to match your chosen allocations. Select at least annual rebalancing -- or as often as quarterly.