I think I found the napkin where you scribbled your New Year's resolutions. You may have left it behind after you downed your last eggnog latte of the season. Here's what was on the napkin: "Eat less. Exercise more. Spend more time with family. Spend more time at work. Spend less money on coffee."
Is it yours? Even if it isn't, yours may not look too different. But there's one resolution missing, one that's on the list of most people's long-term goals, if not among their resolutions: "Quit job." Retirement is the No. 1 financial goal for most working investors.
Here are six steps you can take in 2010 to help you move up the date when you hang up your work boots and rip up that time card for good.
1. Save even more. This is the surest way to improve your prospects for retirement. And thanks to a few contribution limit increases, you'll be able to save more on a tax-advantaged basis. The contribution limits to 401(k)s, 403(b)s, and 457s will remain at $16,500 in 2010. The contribution limits to Roth and traditional IRAs will also remain the same, at $5,000.
Likewise, there are no changes to the limits to the additional so-called "catch-up" contributions (available to workers 50 and older): $5,500 for 401(k)s, 403(b)s, and 457s; and $1,000 for Roth and traditional IRAs.
Increasing your annual savings by $1,000 is just $83 a month, but it can add up to $15,300 over 10 years, $50,000 over 20 years, and $125,000 over 30 years (assuming an 8% annual return). And contrary to popular belief, a lot of stocks have generated 8% average returns even during a lousy decade for stocks, including Caterpillar (NYSE:CAT), United Technologies (NYSE:UTX), and Research In Motion (NASDAQ:RIMM).
Act now if you want to translate $83 a month into tens of thousands of dollars. Not only will your money have more time to reproduce, but also, many employer-sponsored retirement plans don't allow for lump-sum contributions. That means you won't be able to add that extra $1,000 at the end of next year.
2. Stop eating your retirement. To save more, you have to consume less. Think about where your money goes and what expenses you could do without. In many cases, a small change could mean big savings, with virtually no change in lifestyle.
In a past issue of my Rule Your Retirement newsletter, I interviewed Fred Brock, the author of Retire On Less Than You Think. He provided a small example of how a slight alteration to your daily routine can add up: "Say you buy two sodas a day from a soda machine at work for a dollar. That is $40 a month. If instead you brought your sodas in your briefcase, you could save $30 a month. If you invest that $30 a month at 6%, that is over $30,000 in 30 years."
You didn't know that vending machine at work was costing you so much, did you?
3. Stop borrowing your retirement. Your portfolio will never be able to replace your paycheck if your assets aren't growing significantly more than your liabilities. Earning 6%, 8%, or even 12% on your investments may not be able to overcome credit card debt with interest rates of 16%, 18%, or even 32%. You can't afford to subsidize profits for Bank of America (NYSE:BAC) or American Express (NYSE:AXP). Eliminating high-interest consumer debt should be the No. 1 priority of your retirement plan.
There are also advantages to eliminating your mortgage debt before you retire. If your house is paid for, that's one big monthly expense you don't have to worry about. And lower retirement expenses mean you'll need less retirement income and might be able to retire sooner. You also may be able to get a reverse mortgage, which can help turn home equity into a retirement paycheck.
4. Turn a hobby into an income. Is there something you do that can earn extra money, either now or in retirement? Not a job, but something you enjoy. Perhaps something you always wanted to do, such as teaching, writing, painting, or being a private investigator (a top choice of the "working retired"). Maybe it's putting in a few hours at a local store. Making some extra money now could increase your savings and move up your retirement date. Doing part-time work might enable you to begin your part-time retirement.
5. Run the numbers. Though most people want to retire, most people haven't calculated how much they'll need to retire. Visit the Fool's online calculators to see where your current plan will lead.
6. Get an asset allocation plan. Any good retirement plan involves an investment plan. And while picking stocks like Apple (NASDAQ:AAPL) and avoiding ones like AIG (NYSE:AIG) can have a big impact on your results, it's far more important to decide exactly how much you'll have in stocks, bonds, real estate, and cash, and how often you'll adjust your mix.
This is the most frequently discussed topic in my newsletter, and on our members-only discussion boards. Saving money is a big first step, but where you put that money is a crucial next step. Nothing has a greater impact on your portfolio's ability to support your retirement than your asset allocation.
