Some sobering figures on retirement preparedness were published in June. In a survey conducted by Northwestern Mutual, around half of respondents said they don't expect to have enough saved by the time they reach retirement age. Even worse, baby boomer and Gen X respondents were among the least confident compared to other age groups, and they don't have multiple decades to change course. Regardless of whether you're just a few years from retirement age or have a whole career ahead of you, consider these key strategies to relieve stress and keep your retirement plan on track.
Set measurable goals
There are a lot of variables that determine your required retirement savings. These include retirement age, cash-flow needs, income sources, tax liabilities, and inflation. Many of those variables are out of your control or impossible to predict a few decades in advance, so it's hard to put together a long-term action plan. As a result, it's usually ineffective to strive for a precise number as a retirement savings goal.
Most people enjoy more success with goals that are manageable, short-term, and repeatable. It can be daunting to plan around saving a huge number a few decades down the road. It's a lot easier to create a monthly budget with a target savings rate. If you can achieve those monthly goals with some consistency, those achievements can compound over time to deliver the best possible outcome in the long term.
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Households should strive to save 15% to 20% of earned income during their working years. This is one of the most important steps in a retirement plan. It's the foundation upon which everything else is built. Not everyone is going to get to those figures, especially not right away. Nonetheless, it's hard to address any issues that aren't measured.
If you want to get ahead on retirement planning, come up with a target savings rate, develop strategies to get there, and measure your progress. It's important to calculate the amount you've banked relative to the amount you've spent. Do this exercise every month, quarter, and year to assess and adjust if necessary.
Increase your savings rate
The average personal savings rate is currently under 5%, so this is definitely one of the weak points in retirement planning.
There are several strategies that people can use to improve their savings rate. Setting a budget is important and removes a lot of guesswork -- merely quantifying saving and spending can go a long way. It can also be fruitful to take full advantage of 401(k) match programs, if they are offered by your employer. Some people also benefit greatly by splitting their direct deposits into multiple accounts, ensuring that a defined portion of each paycheck is being squirreled away before it even hits checking. These are all simple steps that can be taken relatively quickly.
Some households can benefit from more comprehensive financial planning overhauls. High-interest debt, notably credit card balances, can be cripplingly expensive. Paying down high balances can free up hundreds of dollars in monthly cash flow. Other households can reduce interest expenses on healthier debt, such as mortgages and automobile loans, through financing. Not every refinance offer is actually helpful, but some people can take advantage of major shifts in macroeconomic or personal circumstances. Other households can improve their performance by utilizing digital tools that track expenses, which are offered by a number of banks and third parties. These tools help users to really understand their consumption behavior, and it might uncover opportunities to cut out expenses that aren't delivering much value.
Build a sound investment portfolio
The fun part really starts after you've established strong savings habits. As you accumulate assets, it's important to put them to work.
Retirement portfolios should be focused on growth early on. Equities, especially high-quality growth stocks, should feature prominently for anyone who is more than 15 years away from retirement. An aggressive growth allocation should help you maximize investment gains, but it also leads to high volatility.
As you get closer to retirement, it's important to lock in gains and limit downside risk. A lot of the hard work has already been done, and you don't want to throw years of progress down the drain with an ill-timed bear market. That's why it's important to reallocate toward bonds along with value and dividend stocks as you approach retirement age.
Make sure that your retirement portfolio allocation reflects your goals, risk tolerance, and time horizon, and you should be OK. A household near the current median annual income at $70,000 can amass over $1.5 million over a 35-year period by achieving a 15% savings rate and a 7% compound annual growth rate (CAGR) on investments. That number goes even higher if earnings increase over time with inflation or career advancement.
According to that Northwestern Mutual survey, most households would be comfortable with $1.5 million at retirement. According to the 4% rule, that would provide $60,000 of annual cash flow. Combined with Social Security benefits, that should be enough to make most people comfortable and confident in their retirement planning.
