Far too many people make bad choices when it comes to retirement. It’s the equivalent of choosing candy bars over the solid meal.
According to a study by David Blanchett at Morningstar, a handful of decisions can make the difference between saving enough for a long retirement — or coming up short.
“Knowing when we plan to retire helps determine how much money we need to save and our standard of living in the meantime,” Blanchett found. “Unfortunately, our retirement plans are often wrong, and that can wreak havoc on our finances.”
How can we make better decisions for retirement planning? One principle is the knowledge that increasing saving over time will build a bigger nest egg. Here are three key moves that can lead to a better outcome:
— Retire Later. Americans are retiring early for any number of reasons, but it could impair their long-term retirement prosperity, Blanchett notes.
“Despite our intentions,” Blanchett notes, “many Americans retire earlier than planned: For example, someone who expects to retire at 65 may be more likely to actually retire at 63. This happens for a variety of reasons—including health issues and job changes—but the impact can be severe: fewer years of saving combined with a greater need in retirement.”
Unless your health is poor, wait as long as possible to retire while contributing to your retirement funds. Compound interest will help you build a bigger retirement kitty. Besides, you reap the highest-possible Social Security benefit at 70.
“Choosing when to retire,” writes Blanchett, “is one of the single most important financial decisions we make in our lives. The decision has a lasting impact on our ability to have a comfortable retirement, and, less obviously, it shapes our pre-retirement behavior long in advance of retirement itself.”
— Save More. Here’s where simple math is on your side. Having more time to save is always a better idea.
Ramp up your retirement plan contributions if you can. Fortunately, if you’re over 50, you can save an additional $6,000 annually as a “catch-up” contribution to your 401(k), 403(b) or 457 plan. That’s in addition to the $18,500 yearly maximum you can sock away.
You can invest in a small group of index mutual funds that cover global stocks and bonds through your retirement plan. If you don’t want to bother with picking individual funds, you can invest in pre-set portfolios called “target date” portfolios.
There are also guaranteed annuities, individual retirement accounts and other vehicles outside of your employer-sponsored plans. Just make sure your overall portfolio risk is appropriate for your age and profession: Don’t load up in any one vehicle.
“Buying guaranteed income when appropriate, derisking investment portfolios, working in retirement, and a host of other factors still apply,” notes Blanchett. “But they should not distract individuals and their advisors from setting aside enough income throughout their working lives to reach their retirement goals.”
— Plan Ahead. Use online tools to see how much you should be saving. They do the math for you to give you some ballpark estimates. I recommend ES Planner Basic, which is free.
“Retirement-planning tools can help people estimate the likelihood of reaching their desired retirement income,” Blanchett adds.
“Based on information such as current salary, accumulated savings, savings rate, years to retirement, and projected investment returns, these tools can simply and powerfully illustrate the levers that investors can pull to help improve their chances of retirement success.”
The best time to do the math on how much you need for retirement? If you haven’t already done so, run some numbers today.
