Talk to any financial advisor and the biggest piece of advice is usually, “pay yourself first.”
“This is something you can control,” says Ken Ward, president of Park + Elm Investment Advisers in Indianapolis.
The bigger problem is that many Americans aren’t paying themselves at all. According to a GOBankingRates survey, one in three Americans has $0 saved for retirement and 56 percent of Americans have less than $10,000 saved for retirement.
Don’t get into the trap of saying, ‘I will do it tomorrow,'” says Jamie Ebersole, certified financial planner at Ebersole Financial in Wellesley Hills, Massachusetts. “For most people this is a recipe for disaster. Start saving now and even taking small steps will help.”
[See: 7 Ways to Avoid Financial Stress Over the Holidays.]
Instead of focusing on returns, which can’t be controlled, Ward says focus on capturing returns in the market at the lowest cost possible including contribution amounts, diversification and asset allocation, minimizing taxes, and choosing low-cost investment funds.
Even for adults who are nearing retirement age, there’s still time. For example, Ward says he recently put a plan together for a 50-year-old woman who was a new client.
With $58,000 in her retirement accounts she was concerned about the future, Ward says. Analyzing her cash flow and making a few cuts to monthly bills freed up some funds. And her daughter recently graduated college, so tuition payments were no longer a concern.
“We were able to boost her 401(k) savings contribution with her employer matching up to $9,000 a year,” he says, along with full funding a Roth IRA at $6,500 a year. “She would like to work until age 67, which is when she gets full Social Security benefits,” Ward says.
Based on a conservative investment return of 6 percent over these 17 years, she will have gone from $58,000 to over $600,000 by age 67, Ward says, “so it is possible.”
Understand what is considered taxable income in retirement. “Taxes are a huge problem,” says Richard E. Reyes, a certified financial planner at Wealth & Business Planning Group in Maitland, Florida.
Most people plan their retirement for their maximum tax bracket, he says, because unlike a Roth IRA, most people who are retiring with a pension, 401(k), 403(b) or a traditional IRA don’t understand that it is all taxable.
“Most retirees I deal with are paying more in taxes now than they ever did while in their working years,” he says.
Automate your savings. Most financial experts say this is one of the most important things to do.
“It’s a great way to create a disciplined savings program that not only allows for retirement savings, but also curbs the desire to spend what is not available,” says Divam Mehta, founder of Mehta Financial Group in Glen Allen, Virginia. “Even making small contributions will go a long way toward retirement due to the power of long-term investing.”
This is especially true for self-employed individuals who are charged with managing their own savings process instead of being on a 401(k) via a payroll.
“Depending on the situation, self-employed individuals can actually set aside more funds in a SEP or Simple IRA than employees can in a 401(k),” Ward says.
Then create an escalation process. Start by opening an account and then increasing your investing contribution by at least $25 a month, Davis says.
Target saving 15 percent of income. A major pitfall is limiting retirement investing only to what the law allows in “retirement accounts,” says Ilene Davis, a certified financial planner at Financial Independent Services in Cocoa, Florida.
“Just because the max on an IRA is $5,500 or $6,500, or there is a cap on an employer plan, doesn’t mean that’s all you should save,” she says. “Particularly if the total savings is below 15 percent of income in current dollars.”
[See: 7 Stocks to Buy for the Baby Boomer Retirement Wave.]
Investors can then estimate retirement benefits using the Social Security’s estimator.
Investors should plan on withdrawing 4 percent of their assets during retirement to continue their lifestyle and keep up with inflation, says Frank Files, a vice president with Pennsylvania Trust in Radnor, Pennsylvania.
“If someone is used to spending $200,000 a year when they were working, then their goal would be to have $5 million put away for retirement,” Files says. “Not everyone has that luxury, so it’s important to set realistic goals and review factors and variables that could impact one’s spending.”
Not all debt is bad. Davis recently met with a 21-year-old client whose dad taught him all debt was bad. His mortgage was $800 per month with an interest rate of 4.2 percent, but he was paying $2,000 monthly so he could retire the mortgage early.
“I showed him how that $1,200 a month could add up if he invested it in a diversified portfolio and left it to grow over the years,” she says.
Given his age and today’s rates, she showed how having the lump sum up front worked, when compared with what he could earn by investing the mortgage payment in the marketplace.
“He said it was a real eye-opener,” she says.
Reduce everyday expenses. Start by paying off credit cards and then using that money for investing, Davis says. Investors should consider opening a home equity line of credit and use it to pay off any credit card debt since home-equity interest rates are far less than those of credit cards, says Art Koff founder of RetiredBrains.com.
To cut down on household expenses, he also suggests setting your thermostat lower in the winter and higher in the summer since only a few degrees can save 10 percent or more on a utility bill. He also suggests checking phone bills to make sure one isn’t being charged for equipment that isn’t being used or shouldn’t have.
“There are several spending habits that can become extremely wasteful and harmful for retirement if not corrected,” Mehta says. “Some of the most egregious are paying excessive fees for gym memberships, dining out and paying for cable.”
Investors can also start a side hustle. From doing pizza delivery to driving for Uber or Lyft or selling on eBay (ticker: EBAY) or doing some consulting work on the side, there’s plenty of ways to find extra stream of revenue that can be added to retirement funds, Ward says.
Another option, which many baby boomers are using — delay retirement and work longer.
[Read: 4 Tips for Retooling Your Retirement Plan After Divorce.]
Regardless of what tactics you take, Davis says the key for all investors is to start investing and to continue for the duration into retirement.
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How to Save More Effectively for Retirement in the Post-Recession Economy originally appeared on usnews.com
