Chances are that as soon as you start investing, you’re thinking about retirement. If you aren’t, you should be. There are few, if any, financial goals that require more legwork than saving and investing for retirement. Which means there are few financial goals that should come before investing for retirement.
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But putting retirement at the top of your to-buy list is not enough to guarantee you’ll reach it fully funded. The good news is that investing for retirement is more science than art, with time-tested guidelines to help you through it. Here are financial experts’ best tips for retirement investing to help you save and plan for a fruitful retirement:
— Start now, even if it’s small.
— Be consistent.
— Automation is your friend.
— Use a Roth, too.
— Consider Roth conversions.
— Plan for downturns.
— Invest in your health and yourself.
— Determine an appropriate distribution rate.
— Watch out for that fraud.
— Periodically review your plan.
Start Now, Even if It’s Small
“When it comes to saving for retirement, it is often the case that it is less important how much you save than it is just to get started,” says Andrew Crowell, a financial advisor and vice chairman of Wealth Management at D.A. Davidson. You can always increase your savings rate in the future, “but getting in the habit of putting a proportion of your paycheck into your future every month is an important first step.”
The earlier you start, the more time the power of compounding will have to work in your favor. At a 7% annual return, investing just $50 per month for 40 years could turn into more than $130,000 thanks to that “eighth wonder of the world,” as Warren Buffett has dubbed compound interest.
Be Consistent
Just as earlier is better when it comes to saving for retirement, so, too, is frequency, says Doug Huber, deputy chief investment officer at Wealth Enhancement Group.
“Having a consistent approach to making regular contributions has dual implications,” he says. First, those small, regular contributions can add up to a considerable amount. Investing $50 only once per year would leave you with only about $12,000 in 40 years, rather than $130,000 if you invested every month.
Second, and perhaps more importantly, is that these regular contributions can smooth out the effects of market volatility, Huber says. “By regularly contributing in a prescribed fashion, new investments will be invested regardless of short-term market moves and will help average the good and bad periods.”
Automation Is Your Friend
You may or may not want to use autopilot behind the wheel of your car, but putting your retirement savings on autopilot is the best way to ensure you stay on track.
“After committing to a retirement savings plan, the single most effective step is to limit future temptation and decision fatigue by setting up automatic contributions,” says Ashley Weeks, a wealth strategist at TD Wealth.
Automating your contributions means you won’t have to put “contribute to my retirement” on your to-do list each month. It also ensures you don’t “accidentally” spend the income intended for your savings on Taylor Swift tickets. Your future self will thank you, even if your present self has a bit of FOMO.
Use a Roth, Too
Roth accounts are funded with after-tax dollars. This means you don’t get a tax deduction today for your contributions. Instead, you get to withdraw those savings tax-free in retirement.
Supplementing traditional retirement savings, like those in your 401(k), with a Roth option can give you more control over your income taxes in retirement. Roths are also not subject to required minimum distributions, or RMDs, so you can leave the money inside the account as long as you’d like. But not every employer offers a Roth 401(k), and those with high income may not be eligible to contribute to a Roth individual retirement account. Enter the Roth conversion:
Consider Roth Conversions
A Roth conversion involves converting pretax retirement savings into Roth savings. You’ll pay income taxes on the amount converted from a traditional IRA to a Roth IRA in the year of the conversion, but then reap all the future benefits of a Roth later on. Best of all, they’re available to anyone, regardless of income.
Roth conversions can be particularly attractive if you’re currently in a lower tax bracket than you expect to be in the future, says Belinda Herzig, national senior wealth strategist at BNY Wealth Management. It can also be attractive if you have itemized deductions that can offset the income tax liability of the conversion, she says.
That said, she recommends running a tax projection with your tax advisor to see the full impact of a conversion before undertaking one.
Plan for Downturns
Stock market declines and even recessions are a natural part of the economic cycle. Rather than events to be feared, you should plan and prepare for these downturns.
If you’re still more than a decade out from retirement, all this may require is some mental preparation and grit. You can afford to wait out stock market declines. And your portfolio can recover from them as long as you don’t sell your investments in a panic while in the red.
Investors who are closer to retirement may want to take a more defensive stance.
“Equity markets are at record highs, so consider annuities to help stabilize your savings and protect your downside,” says Dave Byrnes, head of distribution at Security Benefit, which offers annuities. Annuities can provide guaranteed income with potentially higher interest rates than other fixed-income products. But they can also harbor hefty fees, so be sure to read the fine print before purchasing.
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Invest in Your Health and Yourself
Living a fruitful life in retirement isn’t only about accumulating financial wealth. Physical and mental health are equally important. And safeguarding these should start today, too.
Unhealthy habits like a poor diet or lack of exercise can cost you down the line, both financially and physically. They could increase your medical bills, drain your savings and potentially impact your ability to work, says John Faustino, head of Broadridge’s Fi360. “The strong connection between physical and financial health makes good eating and exercise decisions smart financial moves.”
Similarly, you should devote time to consider how you’ll stay engaged physically and mentally in retirement.
“Talk to family and friends a few years ahead of you on the retirement journey and get to understand what’s worked for them in terms of post-retirement activities,” Faustino says.
Retirement is personal, so don’t expect to mirror another’s plan exactly. But seeing how others have done can help you chart your own path, he says.
Determine an Appropriate Distribution Rate
As you approach retirement, you should start thinking about how you’re going to turn all those hard-earned savings into an income stream.
“Start with a deep dive into your living expenses by calculating how much you will pay toward rent or mortgage, utilities, maintenance fees, basic needs, health care and food,” says Ross Mannino, private wealth advisor at Ameriprise Financial. Make sure to also consider discretionary expenses like vacations, hobbies and entertainment.
“Next, total all of your liquid assets which can be converted to cash in two to three days,” he says. This is your liquid net worth.
Divide the expense total you calculated previously by your liquid net worth to get your annual distribution rate.
“Finally, ask yourself: Who are your heirs, and what percentage of your assets would you want to leave them?” Mannino says. “If this number is 100%, plan for your distribution rate to be 4% maximum.” The higher your distribution rate is, the fewer assets you’ll have left for your heirs.
Watch Out for Fraud
Saving for retirement is important, but equally important is protecting that money. Fraudsters can derail your retirement savings as effectively as a tree in Tarzan’s swinging path.
Financial scams are increasingly prevalent, making it imperative to be aware of “the many ways in which fraudsters may get in the way of your retirement goals,” Crowell says.
These can include phishing scams where bad actors send an email that appears to be from a familiar source, such as a bank or internet service provider. They may also call you or pose as charities, tech support or investment providers.
“Typically, fraudsters create a false sense of urgency to get the saver to act before they’ve paused to think and reflect rationally,” Crowell says. “Speak with a trusted financial advisor if something feels off. In most cases, your gut may be right.”
Periodically Review Your Plan
Life is constantly in flux. And your retirement plan should be as adaptable as you are.
“It’s important to review your circumstances on a regular basis and modify your plan accordingly,” Faustino says. Unexpected expenses may cut into your savings, while health issues may warrant a more liberal spending strategy.
“While many have concerns about outliving savings, it’s critical to focus on and adapt to our most precious asset: time,” he says. “Honestly assessing financial and health assets simultaneously is required to optimize retirement planning.”
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10 Tips for Retirement Investing originally appeared on usnews.com
Update 12/06/24: This story was previously published at an earlier date and has been updated with new information.
