You know you should save more money for retirement. You want to save more. But sometimes the realities of life get in the way.
It’s not always possible to increase your monthly 401(k) plan contributions or to put more in your IRA. After all, you have plenty of other bills to pay.
But there’s good news. You can still make several moves that will help you have more money for retirement. Keep reading to find out.
Grab Your Employer Match
We understand that you might not be able to fill your 401k account to full capacity. But at the very least, try to take full advantage of your employer match (if you have access to one).
Let’s say that your employer matches 50 cents for every $1 that you invest, up to a limit of 6 percent.
That means that if you invest 6 percent of your salary, your employer will chip in another 3 percent — which will allow you to invest a total of 9 percent of your income towards retirement.
That’s a great way to get your hands on “free” money.
You might be asking, “How can I increase my monthly contributions if the whole point of this exercise is that I can’t save any more?”
Think about your total financial situation. See if there are any other ways you could free up some cash for retirement.
Are there any additional spending cuts you could make?
Perhaps fewer dinners out or more modest vacations? What about periodic events like bonuses or unexpected cash gifts?
Putting these windfalls right into your 401(k) is a great way to use your employer’s 401(k) matching policy to the fullest extent possible.
Invest in Tax-Advantaged Accounts
Have you heard the expression: “location, location, location?”
Most people use this phrase to describe real estate. But in the world of investments, location matters.
A standard brokerage account doesn’t offer any tax benefits. You pay taxes on your income in the year in which you earn it.
Your investments get continually taxed as they grow. And you’ll pay taxes on your interest and gains when you withdraw.
But your 401k, IRA and other retirement accounts pose tax benefits.
Some allow you to defer your taxes until you retire. Others allow you to pay income tax upfront, and enjoy an exemption from capital gains and interest taxes in the future.
If you’re investing for retirement, you should locate your savings in a tax-deferred or tax-exempt account.
Your locations of choice are your company 401(k) or 403(b) plan and an IRA account.
Pay Attention to Your Asset Allocation
Next, implement a smart asset allocation strategy, and nurture that strategy over the course of your investing career — from the early years throughout retirement.
How does asset allocation help you have more money for retirement?
Diversification is a time-tested way to preserve capital while maximizing gains by limiting your individual asset class exposures.
What does that mean? Let’s show an example.
Johnny Q. Saver has a retirement portfolio that’s filled with diverse asset classes — such as U.S. large cap stocks, emerging markets equities, investment-grade bonds, and commodities.
These asset classes tend to behave differently across market cycles.
Sometimes his bonds are up while his stocks are down. Sometimes his U.S. stocks have risen while his emerging markets stocks have dropped.
Sometimes his commodities investments rise, then fall, then rise again, with no obvious correlation to the rest of his stocks and bonds.
Having these diverse exposures in your portfolio keeps a natural check on how bad of a blow you could take when one of those asset classes takes a severe hit.
And smoothing out the volatility might help you maintain more money for retirement over the long-term.
Change Your Allocation Over Time
As you head closer to retirement, you’ll want to change your portfolio so that it reflects your changing needs.
When you’re decades away from retirement, you’ll want to pursue growth. That means you’ll want more of your investments to consist of stock funds and other “growth” assets.
Retirement means that you have a greater need for income. This means you’ll need more fixed income investments, such as bonds.
You’ll also want to shift your equity portfolio to more income-oriented sectors like high dividend stocks.
A good rule of thumb is to have somewhere between 40-60% of your portfolio in equities when you start retirement.
More conservative investors will be at the lower end of that range, while extremely risk-averse types may take the level down closer to 30%.
For very aggressive investors the equity portion could be 70% or more.
Remember, of course, that the growth side of the investment equation doesn’t go away the minute you retire.
You may have 30 or more years left to enjoy, and you want to make sure the money doesn’t run out on you.
That’s why it is a good idea to keep as much of a position in equities and other growth-oriented assets as your situation, timeline, goals and risk tolerance permit.
How much money should you keep in equities, bonds and other asset classes?
Use an online service like Jemstep’s Portfolio Manager to find an ideal asset allocation that fits your specific situation and preferences. A basic account is free.
It’s fine to rebalance your portfolio in order to keep your asset allocation on-track.
But you should avoid excessive “churn” in your portfolio — buying and selling far too much. This could work against you in three ways:
- It could trigger more “tax events” (causing you to pay more in short-term capital gains tax and other taxes)
- It could cause you to pay more transaction costs, such as buying and selling fees
- You might be at risk of panic-selling (more on that below)
Instead of “churning,” manage your portfolio so that you have a reasonable amount of turnover: enough to keep your asset allocation on-track, but not so much that you’re damaging your future through fees and taxes.
Portfolio Manager can give you unbiased advice about what to buy and sell, and it can also give you rebalancing reminders.
One of the best ways to conserve your retirement money is behavioral: resist the urge to panic if the market crashes.
Imagine that you had retired in 2008, the year when world equity markets collapsed and there was talk of a second Great Depression. Many people panic-sold at or near the market bottom.
That means that they turned paper losses into actual losses.
Those who didn’t panic in 2008, on the other hand, were rewarded for their patience when the market recovered all its losses in 2013 and went on to record a succession of new record highs.
The equation is simple: behavioral discipline equals more money at retirement. Be conservative about the amount you withdraw from your portfolio.
If possible, get some part-time or hobby income to keep afloat until market conditions improve.
Avoid Excessive Fees
Investment fees and expenses make a massive impact on your portfolio.
Unfortunately, many people are not aware of how much they’re paying.
In fact, some people might not know that they’re paying any fees at all.
You won’t get a bill in the mail for your investment fund fees. You don’t need to sign a check or swipe your debit card.
But you’ll pay those fees, nonetheless. The fees are quietly deducted from your investment accounts.
Fund fees aren’t the only type of expense you might pay.
Financial advisors often charge a percentage of your assets — typically between 0.5 percent to 2 percent — in order to manage your portfolio.
(And some brokers might steer you towards investments that pay them a commission, even if it’s not the best choice for you.)
Remember, every dollar that finds its way into the pockets of another is one dollar less that you have for retirement. Over time these dollars add up.
How much of an impact do they make?
Johnny Q. Saver invests $100,000 for 30 years. He receives a long-term annualized 8 percent rate of return.
That means that at the end of 30 years, his portfolio is worth $1,006,000. Johnny is a self-made millionaire!
Alan Q. Payer invests $100,000 for 30 years, but he pays 1 percent in fees. He would have received an 8 percent long-term annualized return, except that his fees ate away at one percent of that, leaving him with a 7 percent long-term return.
After 30 years, his portfolio has only grown to $761,226. He misses out on almost $240,000, thanks to that one percent fee.
That’s how much of an impact fees can make on your retirement.
So how do you get a handle on fees?
First, review your accounts and find the fees. Fee disclosure is required by law on your retirement and other investment accounts — which means the information is there.
Do some research. Find out whether the funds in your portfolio are reasonably priced relative to their peers.
If you use actively-managed funds, see how they have performed relative to passive index funds to determine whether the extra amount you are paying is justified by the manager’s outperformance.
(Hint: it’s often not).
If you need help, use an online service like Portfolio Manager, which can give you specific buy-and-sell recommendations that take fees into account.
And Portfolio Manager’s recommendations are always unbiased.
Saving more money for your retirement is still important.
But if times are tough and you just can’t put aside any extra income, you can still optimize your portfolio. These tweaks can help you achieve a more secure retirement.
From the Mint team: Are you looking for IRA or other retirement accounts that pose tax benefits? Take the first step to finding the right IRA for you by visiting Mint’s IRA information page.
Do you want to minimize avoid excessive fees? Check out some of Mint’s partners who provide low-cost investment accounts.
Jemstep.com is the leading online investment advisor that provides unbiased advice on how to best invest and manage your retirement portfolio across all your accounts, including your 401(k). Using patented technology and proven portfolio management methodologies, Jemstep tells users exactly what to buy and sell to make the most of their money taking into account, fees taxes and fund quality. Jemstep’s easy-to-use website takes the complexity, difficulty, and anxiety out of investing. Providing the high-caliber, personalized advice that has traditionally been available only to wealthy investors with assets greater than $5 million, Jemstep empowers all investors to take charge of their retirement planning and invest with confidence. A Registered Investment Advisor with the SEC, Jemstep is led by a team of experts with over 100 years’ combined experience in financial management and technology innovation and development. Learn more at Jemstep.com.