Achieving financial independence depends heavily on how much money you set aside in your retirement account every year. Even if you make millions over the course of your career, without saving enough, it might not be enough to sustain you in the lifestyle you’ve become accustomed to once you no longer have an income to draw from. To ensure that your savings will go as far as possible, follow these seven dos and don’ts to maximize your retirement savings.
1) Get on track early
As you get older, your retirement savings need to grow—and they should grow at a faster rate than when you were in your twenties or thirties. As such, start contributing to your 401(k) plan early on in your career so that you don’t have to worry about making up lost ground later on. If possible, maximize your contributions (you can do so by deferring as much money as possible through automatic payroll deductions). You’ll also want to put money into an individual retirement account (IRA) early on; if your employer doesn’t offer a 401(k), then roll over previous employers' 401(k) plans into IRAs.
2) Invest your way to a nest egg
The single most important thing you can do to ensure your retirement is to start saving today. While it's impossible to predict what your expenses might be 30 years from now, calculating how much money you'll need can give you a rough idea of how much you need to save each month. The closer you are to retiring (or already retired), consult a financial adviser who can help create a plan that makes sense given your current situation. Find someone who takes into account your risk tolerance as well as your time horizon—they'll suggest an amount that varies depending on when exactly you plan on retiring. For example, if they're telling you it will take 10 years before they think you're ready, aim for something more conservative than if they said 20 years.
3) Contribute regularly
Even if you don’t have a large amount to save each month, socking away a little money now can grow into a large nest egg when you look back on it 20 years down the road. If you want to enjoy your golden years to their fullest, there’s no better time than now to start preparing. You might not be able to contribute as much as others, but if you aim for modest goals, even $50 or $100 a month can make an impact in your later years. Contributing regularly over time will help ensure that your savings aren’t eaten up by inflation—and at least some of them will likely be put toward fun activities like cruises and golf games in retirement.
4) Rebalance periodically
Investing isn’t a one-and-done proposition. All investors should consider rebalancing their portfolios periodically in order to maintain proper diversification. Investopedia defines rebalancing as the process of bringing a portfolio back to its original asset allocation. In other words, if your portfolio has grown out of alignment with your target allocations—say, you wanted 30% stocks and 40% bonds but they ended up at 40% stocks and 30% bonds—you would sell off some of your stock holdings in order to buy more bonds until you were back on track. The most common time period for periodic rebalancing is once per year, although you can choose any period that makes sense for your goals.
5) Expect the unexpected
Because life is unpredictable, there are really only two things you can do to prepare your retirement portfolio: Save as much as possible, ideally enough to at least maintain your standard of living in retirement—known as replacement income—and diversify your portfolio. That means putting money into a variety of funds with different risk levels that are appropriate for your age and tolerance for risk. At some point, it's worth considering having a strategy of investing more aggressively in stocks during your younger years if you're able to accept greater potential losses (in exchange for potentially higher returns) when starting out, then shifting to safer assets like bonds later on as you near retirement age.
6) Know your tolerance for risk
The way you answer these questions will determine your asset allocation, which is a fancy way of saying how much of your portfolio should be in stocks versus bonds. Generally speaking, you're comfortable with more risk if: you have time on your side (you plan to retire 30 years from now) or if you have fewer retirement savings than you'll need to make it through retirement. Consider adding some small-cap and international stocks to your portfolio because they can help diversify your holdings -- but remember that these investments can be volatile. They'll likely outperform over the long run -- particularly if they're invested outside your 401(k) -- but they may see losses along the way, too.
7) Diversify your portfolio
When deciding how to invest your retirement money, you have a number of options, including (but not limited to) stocks, bonds, mutual funds, and exchange-traded funds. Before choosing what kind of account is right for you, figure out what kinds of financial risks you’re willing to take. While some people are comfortable with high risk in exchange for potentially high reward over time—which could lead them to invest in risky securities—others don’t feel comfortable investing their retirement savings in anything but safer investments like bonds or low-risk stocks that tend to be less volatile. Once you've decided on a level of risk that feels right for you, now's when it's time to figure out how best to get started saving up.
Conclusion
This post is all about maximizing your retirement savings. The good news is that, unlike most things in life, it doesn’t take a Ph.D. to do it right. As long as you keep these 7 dos and don’ts in mind as you approach retirement, you’ll be set. And then when it comes time to retire? We hope you have a long, happy life ahead of you! Cheers! Do not underestimate how much money you will need: It’s tempting to think that if you live frugally, save a lot and invest wisely, you can retire with enough money to last through your golden years. However, experts agree that there are no guarantees in investing—and many people find themselves outliving their assets by a significant margin. That’s why it’s important to plan on needing at least 80% of your pre-retirement income during retirement—and save aggressively from an early age so that you can afford to spend less than 20% of your nest egg each year after retiring.
