Saving for retirement is a life-long process. The earlier you start, the more time your investments have to grow. A 35-year-old investor will likely have longer to save than a 67-year old. That longer time horizon means your money has more time to compound and grow Compounding means returns on your money are reinvested, which increases the principal and, consequently, your rate of return over time. One example: when you invest in stocks that pay cash dividends, you can take that cash and purchase additional stock, which has the potential to grow and pay additional cash dividends. Over the longer term, this compounding growth can help increase principal and consequently your rate of return.
So while you’re in the workforce, plan to save as much of your salary as you can—especially if your employer offers a retirement savings plan—and invest those savings to increase the likelihood of accomplishing your goals. Employer-sponsored plans like 401(k)s often offer tax deferral and can help you bolster your savings during your working years, so you’re not left relying on Social Security alone for retirement income. And if your employer matches your contributions, your retirement savings could grow faster than you may expect. Even if you can’t contribute the maximum allowed, at least contribute the percentage of your salary that your employer will match.
Not everyone has access to an employer-sponsored savings plan. Don’t worry, you don’t have to be reliant on just Social Security in retirement. You can—and should!—still save for retirement through a number of other taxable and tax-advantaged accounts available.
The type of retirement savings account you choose will likely influence your strategy. Some of the more popular retirement savings vehicles available are:
A 401(k) account offers tax-deferred growth. There are two major types of 401(k)—Traditional and Roth. Traditional 401(k)’s earnings aren’t taxed until the money is withdrawn, meaning you have more money to take advantage of tax-deferred growth—assuming you don’t withdraw any funds before age 59 ½. If you withdraw funds before that age, you will be hit with a penalty. Traditional 401(k)s are best for those who feel confident the growth of their assets will make up for the higher taxes they may likely pay after retirement.
In a Roth 401(k), you pay ordinary income tax before it goes into the account. So, if you don’t want to worry as much about taxes when you make withdrawals in retirement, the Roth 401(k) may be a better option.
You can also roll over your 401(k) to an IRA. Some common times people roll over their 401(K) is:
As you approach retirement age, it is important to get a clear estimation of how much your retirement might cost. One of the simplest and most effective ways to tackle this is to break your costs into two categories: discretionary and non-discretionary expenses.
Think of discretionary expenses in terms of “wants” (hobbies, luxuries, etc.,) and non-discretionary expenses as “needs” (mortgage, taxes, healthcare). Discretionary spending may be flexible, whereas non-discretionary spending may be much less flexible.
Nevertheless, discretionary spending isn’t necessarily less important. It could enhance your lifestyle by helping you to accomplish personal goals and the kind of retirement you envision. If this sounds closer to your personal situation, you might want to consider investments that provide greater growth potential, income and, ultimately, more cash flow.
Assessing Your Non-Discretionary Costs. Compare your expected expenses with your expected income after you retire. Will your income cover your house payment, taxes, health insurance, food and other essential costs? If not, you might consider downsizing your home or cutting other discretionary expenses to sustain your retirement savings.
Assessing Your Discretionary Costs. Will you be able to afford extra luxuries in retirement? If you find you have some wiggle room in your non-discretionary income, you might consider rewarding yourself in retirement with a few more vacations or hobbies—or even spoiling your loved ones.
A key step to helping to ensure your retirement savings won’t deplete is to build a solid financial plan. If you have specific goals to guide your actions, it can be easier to stay disciplined after you retire.
Establish your primary investment objective. How much cash flow will you need to sustain your lifestyle after you retire? It might be prudent to expect to live a long time regardless of your family’s history of longevity. And if you have a younger spouse, it is safer to assume your spouse will likely outlive you.
Your investment objectives may include the following:
Many investors fear contributing to stocks in a retirement plan when the stock market has experienced negative volatility. But stocks are forward-looking, and avoiding stocks just because they are down can be a mistake. Historically, stocks have frequently experienced volatility, even in bull markets. But over the longer term, stocks eventually recover from downward volatility. So if you’re investing goals require long-term growth, don’t let fears of downward market volatility or even of bear markets stop you from allocating money to stocks in a retirement savings account.
Planning for retirement requires a holistic approach, and Fisher Investments has developed a retirement solution to help you achieve your goals. We start by getting to know you, and we can help you tailor a portfolio to suit your goals and objectives. Contact us and speak with us today to see if a different approach may be right for you.