"Retirement is like a long vacation in Las Vegas. The goal is to enjoy it the fullest, but not so fully that you run out of money."
-- Jonathan Clements
A top priority in retirement is not running out of money. To succeed at that goal, we need to effectively save and invest for our future while we are still working -- and then continue to make smart financial decisions as we approach and enter retirement.
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Here are a dozen smart retirement moves to consider making as you prepare for, enter, and live in retirement.
No. 1: Have a plan. One of your most important moves is to have a retirement plan. Leaving everything to chance and hoping for the best rarely works out well. 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 in retirement, too -- such as Social Security, savings, pension income, and so on.
No. 2: Become debt-free. If you're carrying high-interest rate debt, such as from credit cards, it can be hard to achieve any financial goals. After all, many cards charge annual interest rates of 25% or more! If you're saddled with, say, $15,000 of debt, that can cost you around $3,750 each year. Make paying down your debt a priority. Even if your only debt is a low-interest rate mortgage, consider paying that off before you retire, too. Not having mortgage payments due each month while you're on a limited income can make retirement less stressful.
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No. 3: Save aggressively. The more you can save, the better off you'll be in retirement -- especially if you're still many years from retiring. The following table shows how much you could amass if your nest grows by an annual average of 8% annually:
|
Growing at 8% For: |
$5,000 Invested Annually |
$10,000 Invested Annually |
$15,000 Invested Annually |
|---|---|---|---|
|
10 years |
$78,227 |
$156,455 |
$234,682 |
|
15 years |
$146,621 |
$293,243 |
$439,864 |
|
20 years |
$247,115 |
$494,229 |
$741,344 |
|
25 years |
$394,772 |
$789,544 |
$1.2 million |
|
30 years |
$611,729 |
$1.2 million |
$1.8 million |
Data source: Calculations by author.
No. 4: Invest more effectively. It's not enough to just save a lot. Ideally, you'll invest your savings effectively and not just stockpile them in a savings account paying 1% interest. The stock market is a great wealth builder for long-term money. 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 being an active investor, you can 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. The following table shows what a difference your money's growth rate can make to annual investments of $10,000:
|
Growing For: |
Growing at 4% |
Growing at 8% |
Growing at 10% |
|---|---|---|---|
|
15 years |
$208,245 |
$293,243 |
$349,497 |
|
20 years |
$309,692 |
$494,229 |
$630,025 |
|
25 years |
$433,117 |
$789,544 |
$1.1 million |
|
30 years |
$583,283 |
$1.2 million |
$1.8 million |
Data source: calculations by author.
Image source: Getty Images.
No. 5: Consider a traditional IRA. Uncle Sam is ready to help with your retirement savings, by offering tax-advantaged IRAs. In 2017, 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.
No. 6: Consider 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 $200,000 over time, that can all be tax-free income in retirement.
No. 7: Maximize your 401(k). Be sure to make the most of your 401(k) or 403(b) account, too. They sport much higher contribution limits than IRAs -- for 2017, the limit is $18,000 plus $6,000 for those 50 or older. At a minimum, contribute enough to your 401(k) to grab all available matching dollars from your employer. That's free money, after all. (A common match is 50% of your contributions, up to 6% of your salary.)
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No. 8: Consider dividends for your portfolio. As you think about how your portfolio can best generate income for you in retirement, consider holding some healthy and growing dividend-paying stocks. If you don't yet believe in the power of dividends, consider that 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, while stock prices can grow, too.
No. 9: Consider buying an annuity. Another compelling income generator in retirement is a fixed immediate annuity. (Avoid indexed or variable annuities -- those are often problematic, with high fees and restrictive terms.) With a $200,000 investment, for example, a 70-year-old couple might be able to secure $1,030 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, is also worth considering. It costs less and can keep you from running out of money.
No. 10: Get your paperwork in order. Something we all need to do, no matter how near or far we are from retirement, is having certain important documents prepared and ready. These include 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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No. 11: Have a Social Security strategy. If you leave your Social Security income to chance, you risk collecting less (and possibly a lot less) from the program than you could. 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.
No. 12: Consider consulting a financial advisor. Finally, know that you don't have to go it alone when planning for your retirement. 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 you can make a handful of the moves discussed here, you're likely to improve your future financial security and you might make your retirement years a lot more pleasant and comfortable, too.
