How much money will I need to retire and enjoy retirement? Am I saving enough and investing the savings properly for success?
Here are nine tips to keep in mind to make sure your retirement plan is in tip-top shape.
1. Understand the basics of tax-advantaged retirement plans – Examples include IRAs, Roth IRAs, Simple IRAs, 401(k)s, 403(b)s, and others. These plans’ names are confusing, but the bottom line is that they enable you to deduct money directly from your paycheck, tax-exempt. You can then grow that money without having to pay taxes on the profits, and/or withdraw money without having to pay taxes, depending on the type of account. To learn more, download Tilly’s Free Guide to Smart Investing.
2. Strive to maintain a mix of both Roth assets and pre-tax assets – When you retire, you’ll want to have some assets in your retirement plan that you can withdraw without paying taxes. In your retirement account, those are Roth account assets. In most situations, the ideal time to save in a Roth is when you’re young with plenty of time for those assets to grow tax-free. Here is a good article from Investopedia about strategies for Roth assets.
3. Investing early has a serious snowball effect – I like this article in Personal Finance that states if a person saves $100 per month at age 25, he or she would have twice as much money at retirement as the person who saves $100 per month starting at age 35. The earlier you start saving, even in small amounts, the way better your outcome will be.
4. Let dollar cost averaging work to your advantage – I love automatic, monthly investing because when the stock market is going down, you’re buying those investments for less. And, when stocks are going up, you’re not missing out. Dollar cost averaging takes market timing out of the equation – a beautiful thing for the amateur investor.
5. Be aware that the rate of return makes a huge difference – This advice is for all those who believe that past returns dictate future returns. If anything, high part returns often result in lower future returns because many funds do well in the short-term, but very few do well over the long-term. Avoid being the investor who is constantly buying high and selling low.
6. Choose the right retirement funds – I recall my former employer from years ago choosing a lousy mutual fund manager to invest our retirement funds. It hurt us badly. In Tilly’s former blog, “Selecting the Right Retirement Fund”, I recommend low-cost index funds for long-term retirement money investing.
7. Keep your assets properly balanced – Balancing assets (a.k.a., “asset allocation”) is the process of maintaining the proper amount in various types of investments based upon your propensity for risk, your goals, your investment horizon, and other factors. There are other factors such as your age, your “needs” versus your “wants,” and how much knowledge you have about investing. (The less knowledge you have, the less risk you may want to take.) One tip is to maintain multiple accounts like many people do; then you’ll need a way to view all of your assets holistically. Remember to review your asset allocation at least annually or after big life changes.
8. Avoid making high-risk investments in your retirement account – There’s nothing wrong with making high-risk investments you believe in so long as that investment isn’t too high of a percentage of your overall net worth (normally 10 percent or less). But make those investments outside of your retirement account. Your retirement account is for peace of mind.
9. If you have concerns, contact a fee-only CERTIFIED FINANCIAL PLANNER (CFP) – A CFP is a financial planner who has passed rigorous exams and has lots of experience with investments and financial planning. They can answer questions and help you sort out any questions you have. But make sure to seek out a CFP who is designated as a fiduciary advisor. Your employer normally doesn’t provide advice for your planning — only explanation of the funds.
I hope this helps guide your future decision-making. Please contact Tilly if you have any questions or would like for us to help you implement any of these strategies.