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With four sons, I’ve spent a significant amount of time helping them learn how to drive. Thankfully, all of my boys were quick learners, and we had professional driver’s education teachers to do the bulk of the work.
Learning to drive is an important milestone in one’s life. Before a person can drive, they need to complete some classwork to learn the rules of the road. Some of them are laws, and some are just smart, like slowing down when the weather is bad. Other milestones, like retirement, are no different – we look forward to it, but we need to prepare, and we can do that by learning the “rules of the retirement road.”
1. The most important one is to pay yourself first. Automate your savings by having money taken directly from your paycheck and invested in a 401(k), 403(b) or an IRA. By having the money taken directly from your check, you won’t miss it.
Start out small and increase the amount you put away when you get a raise. Make sure you contribute at least enough to get your employer’s full match.
2. Don’t let today’s bills sink tomorrow’s needs. Your expenses tend to grow over time. By living within your means, you should be able to save for retirement and for the emergencies that come up from time to time.
3. Put time on your side. Just putting a little aside each week or each month will build up over time. The longer your money is invested, the longer you have for your money to grow.
If you invest $2,000 per year for 10 years, stop adding to it, but let it grow for another 10 years, you’ll have $43,024 at the end of the 20 years if you earn 5%.
If you wait 10 years, then invest $3,000 per year for 10 years, you’ll only accumulate $39,620 earning the same 5%.
4. Don’t count on living on just Social Security. Current retirees get about 38% of their income from social security, with the balance coming from pensions, investments and personal savings. The future of social security is uncertain. As it stands now, the system may only have enough to pay 74% of scheduled benefits by 2041.
It is likely that Social Security’s problems will be solved because it is one of the most popular and successful government programs in history. In any case, though, it makes sense to plan on other income in retirement.
5. Try to resist borrowing from your 401(k). You will lock in a low rate of return, and it can be a challenge to pay back the loan and save at the same time. In many cases, people stop saving until the loan is paid back. Plus, if you change jobs, that loan becomes a taxable distribution, subject to a 10% penalty if you are under 59, unless you pay it back in full immediately.
6. Don’t cash out retirement plans when changing jobs. It’s tempting to spend your retirement money when you change jobs, but you can end up owing almost half of what you spend in taxes and penalties. Instead, consider one of these options: Leave your money in the former employer’s plan, if permitted; roll over the assets to your new employer’s plan, if one is available and rollovers are permitted; roll over to an IRA; or cash out the account value.
7. Take advantage of your IRA options. If you are maxing out your retirement savings at work, an IRA might make sense if you want to save more. You can set it up to fund automatically from your checking account to make it easy.
8. Compare the merits of the Roth IRA and 401(k). Contributions to a Roth IRA are not tax-deductible, but withdrawals from a Roth are tax-free.
9. Don’t try to time the stock market. In our view, moving money in and out of the market rarely works over time. Also, if your retirement plan allows you to invest in your employer’s stock, limit your exposure. Remember what happened to Enron and WorldCom employees who invested too much in their employer’s stock.
10. Set up an asset allocation plan (your mix of stocks and bonds) and stick with it, regardless of what happens in the market. Rebalance your allocations at least once a year. As you get closer to retirement, you will want to reduce your exposure to risk so you’ll cut back on the amount you allocate to stocks.
Just like driving, retirement planning is easier once you learn the rules of the road.
Important Disclosure:
Mike Bergen is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Beacon Pointe has exercised all reasonable professional care in preparing this information. Beacon Pointe Advisors does not offer legal or tax advice. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.
