Wimbledon is over, the All-Star game’s history and Brexit hysteria seems to be winding down. Which leaves you with a short window before the arrival of the next big event to perform a quick check-up to ensure your retirement plan is on track. Answering these 3 key questions will allow you to do just that.
1. Should you be saving more? Even if you’ve been saving for retirement diligently for years, that doesn’t necessarily mean you’re putting away enough. Perhaps you were automatically enrolled in your 401(k) plan at a low contribution rate and never increased it. (The default for many, if not most, plans with an auto-enroll feature is a mere 3% of salary.) Or maybe the amount you save hasn’t increased even as you’ve racked up pay raises, which means you probably can (and should) save more.
There’s no official guaranteed-to-give-you-a-secure-retirement savings target. But generally you should try to save about 15% a year (including any employer matching funds), which is the figure cited in research by the Boston College Center For Retirement Research. If you’re getting a late start on your retirement savings, you may need to shoot for a higher rate, say, 20% a year. In any case, many people clearly aren’t saving enough. According to Vanguard’s 2016 How America Saves report, the median total 401(k) contribution for employers and employees combined is less than 9% of pay.
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If you think a couple of extra percentage points in your savings rate won’t have much of an impact on the eventual size of your nest egg, not to mention your retirement lifestyle, consider this: A 30-year-old who earns $45,000 a year, receives 2% annual raises and saves 10% of salary would accumulate just over $650,000 by age 65, assuming a 6% annual return. Saving 12% a year, by contrast, would boost the size of that nest egg to nearly $800,000 and a 15% rate would take it to almost a cool $1 million.
2. Does your retirement investing strategy need a re-set? There are plenty of reasons a portfolio that once matched your needs could have gotten out of whack. Since early 2009, stocks have outgained bonds by a margin of more than six to one. So if you haven’t been rebalancing periodically, your portfolio may be a lot more aggressive than you think. Conversely, if you bailed out of equities during market setbacks earlier in the year or when stock exchanges around the world started going kerflooey in the wake of the Brexit decision, you might be invested more conservatively than you ought to be. Then again, you could be one of those people who decided that you just had to have some new offbeat ETF or mutual fund that an investment firm was touting, in which case instead of diversifying your portfolio you may have ended up “di-worse-ifying” it.
The point is, now is a good time to step back, take a cold-eyed rational look at your portfolio and see if it’s invested the way it ought to be. Start by re-evaluating your stocks-bonds mix. Ideally, you want a mix that provides enough growth to build a nest egg large enough to sustain you throughout retirement, but that also affords a bit of downsize protection so you won’t panic and sell when the market takes a dive. You can arrive at a reasonable tradeoff between long-term growth and short-term protection by completing this risk tolerance-asset allocation questionnaire. In addition to suggesting a blend of stocks and bonds that’s appropriate for your situation, this tool will also show you how the recommended mix and others have performed on average over long stretches in the past, as well as in good and bad markets.
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Next, see if there are any investments you might want to jettison, such as ones you’ve acquired that no longer fit into your overall investment strategy or those that seemed to hold promise at the time but haven’t performed as expected. Given that research shows that high-cost funds tend to lag their low-cost counterparts, you might also consider unloading funds with bloated expense ratios. To the extent you can, you’re probably better off keeping most of your retirement savings in a portfolio of low-cost broadly diversified index funds, many of which these days charge 0.25% of assets a year or less.
Remember, if you end up selling investments taxable accounts for capital losses, you may be able to use those losses to offset realized capital gains in other investments held within taxable accounts. Should your losses exceed realized gains, you can deduct up to $3,000 of losses against ordinary income. Any remaining losses can be carried forward to future years. If, on the other hand, you unload unwanted investments for capital gains, you may be able to avoid a tax hit by harvesting capital losses in other investments, say, as part of your annual rebalancing regimen at the end of the year.
3. Can you improve your shot at achieving a secure retirement? Once you’ve re-assessed your savings rate and reviewed your portfolio, you can move on the big retirement question—namely, if you continue with your current plan, what are the chances you’ll be able to retire on schedule and enjoy a comfortable retirement? You can get a handle on this issue by going to a retirement income calculator that uses Monte Carlo simulations to make its projections and plugging in such info as the amount you’ve already saved, how much you plan to stash away each year, the amount of income you’ll need after retiring, when you plan to leave your job and how long you expect to live in retirement.
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Clearly, no tool is going to be able to predict your likelihood of success with complete accuracy. There are too many uncertainties and unknowns for such precision. But if the calculator estimates that your chances of being able to retire when you plan and generate the income you’ll need the rest of your life are uncomfortably low—say, below 80%—then you probably want to re-run the analysis to see how making changes such as saving more, investing differently planning and working longer can improve your retirement prospects.
The point is that by doing this sort of analysis periodically—either on your own or with the help of a financial adviser—you can make gradual changes to your retirement planning as you go along rather than finding yourself in the unenviable position of being forced to make radical adjustments late in life.