Whether you're two decades away from retirement or it's right around the corner, there are smart retirement moves you can make now that can make your financial future more secure. Here are 25 of them to consider.
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- Get out of debt. High-interest-rate debt, such as that from credit cards, can be debilitating. It's not unusual to be charged annual interest rates of 25% or more, and on $12,000 of debt, that can cost you around $3,000 each year!
- Have an emergency fund. We all need a plan for how we'll get by if we lose our job or face a costly health crisis. You don't want to have to drain a retirement account for that, so stock an emergency fund with three to nine months' worth of living expenses.
- Get the paperwork done. No matter how old you are, you need to have a will, a durable power of attorney for finances, a living will, and a healthcare power of attorney (sometimes called a healthcare proxy). You might also look into setting up an estate plan and a trust, among other things.
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- Have a retirement plan. Don't leave your retirement up to chance. Figure out how much money you'll need in retirement and how you'll amass it. Determine and plan for what your income sources will be, too -- such as Social Security, savings, pension income, and so on.
- Appreciate the power of compounding. If you don't already appreciate the power of compounding, consider this: Sock $10,000 away each year for 20 years and if it grows by 10% each year, you'll end up with about $494,000. If it grows for 21 years, it will total more than $544,000! That's a difference of more than $50,000, showing how powerfully money can grow when given a lot of time to do so. Start saving and investing as early as possible, and aggressively, too, as your most powerful dollars are your ones invested earliest.
- Save more. The more you can save, the better off you'll be in retirement. In the example above, if you could save and invest $12,000 each year instead of $10,000, you'd have about $653,000 in 21 years. Aim to increase your saving each year, perhaps by socking away some or all of any raises.
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- Spend less. Spending less will help you save more. Devote a few months to tracking all your spending, to see where your money goes. Then draft a budget and stick to it. Live below your means -- such as by using coupons, comparing prices before buying, bypassing some luxuries, and brown-bagging some lunches.
- Catch up, if you can. If your retirement savings are well below where they should be, take some drastic steps to beef them up. The earlier you do this, the longer your money can grow for you. You might take on a second job for a few years, or regularly do some extra work on the side, such as tutoring or giving music or language lessons. You could take in a boarder for a while or rent out a room on Airbnb now and then. These may not be appealing ideas, but they can make a big difference.
- Invest more effectively. Is your portfolio full of many stocks you bought and forgot about? Aim to only hold stock in companies that you have researched, kept up with, and have great confidence in. If you don't have the ability or interest in deciding which stocks to buy and when to sell, simply opt for one or more inexpensive broad-market index funds. The SPDR S&P 500 ETF (SPY -0.21%), for example, will distribute your money across the 500 companies in the S&P 500, which make up about 80% of the U.S. market.
- Consider including dividend payers in your portfolio. The power of dividends is underappreciated. Researchers Eugene Fama and Kenneth French, studying data from 1927 to 2014, found that dividend payers outperformed non-payers, averaging 10.4% annual growth vs. 8.5%. If you have $250,000 in dividend payers with an average overall yield of 4%, you're looking at $10,000 in annual income. Plus, dividends tend to be increased over time.
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- Keep fees in check. You're charged fees all over your financial life -- in your investment accounts, bank accounts, mutual funds, retirement accounts, and so on. Spend a little time taking inventory of them and see whether you might switch to some lower-cost options. If you can pay one percentage point less on $100,000, you'll save $1,000 -- per year.
- Simplify financial accounts. Many of us have accumulated lots of bank accounts and investments accounts, from various jobs and towns and points in our lives. Consider consolidating some of them, so that they're easier to stay on top of.
- Rebalance your portfolio regularly. If you haven't rebalanced your portfolio in a long time, you may be far from your desired allocation of, say, 10% in international stocks, 20% in bonds, and 70% in U.S. stocks. If so, you'll have too many or too few eggs in various baskets. Sell off assets from the too-full basket and add to the not-full-enough one.
- Consider opening and/or funding a traditional IRA. In 2017, as in 2016, you can contribute up to $5,500 to one or more traditional or Roth IRA(s) -- in total. If you're 50 or older, the limit is $6,500. With a traditional IRA, a $5,500 contribution will reduce your taxable income by $5,500 -- saving you $1,375 if you're in the 25% tax bracket. It can be invested, growing on a tax-deferred basis until it's taxed when you make withdrawals in retirement.
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- Consider opening and/or funding a Roth IRA. With a Roth IRA, a $5,500 contribution has no effect on your taxes in the contribution year. But follow the Roth IRA rules, and you'll be able to withdraw all your contributions and earnings tax-free! If your Roth IRA swells to $100,000 over time, that can all be tax-free income in retirement.
- Make the most of your 401(k). 401(k)s have much higher contribution limits -- for 2017, it's $18,000 plus $6,000 for those 50 or older -- so aim to contribute generously to them, at least enough to take full advantage of any available matching funds. That's free money, after all.
- Get your spouse on board, too. Be sure that you and your spouse are on the same page financially, working together to save and invest. If only one is doing so while the other is spending or racking up debt, you're headed for trouble. Your nest egg can grow much more quickly with two people contributing to it.
- Pay off your mortgage before retiring. Consider paying off your home loan before you retire so that you don't have mortgage payments to make on your more limited income. It can make retirement less stressful.
- Consider an annuity. Consider buying a fixed annuity to provide some retirement income. With a $200,000 investment, for example, a 70-year-old couple might be able to secure $1,000 per month for as long as at least one of them is alive. That can provide much peace of mind. A deferred annuity, that starts paying at a future time, costs less and can keep you from running out of money.
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- Consider dropping your life insurance. If you're paying for life insurance and no one depends on your income any more -- your kids are grown and your spouse will be fine financially without you -- consider ending your policy in order to save money.
- Look into long-term care insurance. Long-term care can be very costly -- which is why insurance for it is costly, too. The earlier you buy it, the less it will cost, so give it some thought. Less wealthy folks probably can't afford it and wealthy folks might just pay for care on their own if it's needed, so middle income people are the ones who have the toughest decision. See how much it would cost you and if it seems worthwhile.
- Tend to your health -- now and later. A key way to enjoy retirement more and to have it cost less is to be in good health and stay that way -- if you can. You may be able to save a lot of years and dollars by getting fitter -- eating more nutritiously and exercising. As you approach age 65, be sure to read up on your Medicare options, too.
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- Have a Social Security plan. Don't just leave your Social Security income to chance. You can control how big your checks are to some degree by starting to collect them earlier or later than your normal (in the eyes of the Social Security Administration) retirement age. There are some other income-maximizing strategies to consider, too, especially if you're married.
- Give your retirement serious thought. Don't just daydream about retirement. As it approaches, think about it in detail. Think about where you want to live or where it makes most sense to live, financially or socially. Think about what you will do in retirement to keep boredom away and whether you'll want or need to find a part-time job for a while. See whether there any steps you might take now to prepare, such as visiting areas where you might move or exploring employment possibilities.
- Consider consulting a financial advisor. Finally, know that you needn't plan for your retirement on your own. It's a critical matter so it can be worth spending a little money consulting a professional. Ones designated as fee-only won't be looking to earn commissions from selling you products, and you can seek one at www.napfa.org. Yes, you may pay several hundred dollars or more, but a good pro might save you much more than that.
If this list of 25 smart retirement moves is daunting, tackle it in parts. Every step you take can lead to greater financial security and to your reaching your future income goals.
