It seems to be the mission of most people to retire happy.
This is a phrase I have heard countless times (from marketing gurus and clients alike) and it is used as a way to describe living the lifestyle that you have always envisioned. When you set personal and financial goals for yourself, and accomplish them in however you have defined success, you get satisfaction from fulfilling your dreams. It is the pot at the end of the rainbow, and your next adventure where you get to celebrate and enjoy doing what you want when you want, with whom you want! All with no worry or angst about spending too much, or running out of money because you lived too long.
It is tragic that the majority of Americans are not saving enough for retirement. Not saving enough to enjoy the time, the people, and adventures later in life, and often being forced to work until the inevitable happens and they pass away. They use pay raises and lump sum windfalls to live for today, purchasing toys, trips, or lifestyle upgrades.
In my mind, the problem stems from one overarching theme. Americans are not properly planning for the future. That is, they don’t have a plan in place to address their needs and see the consequences of always spending, or if they do, they drastically underestimate the cost of retirement. It is not that they plan to fail, but that they simply fail to plan. I am writing this for those people who could use some quick advice on how to save more for retirement.
Fund your 401(K)
If your company offers a 401(K) and has a matching program, it’s in your best interest to contribute up to the employer match. Every additional dollar your employer stacks into your retirement is absolutely FREE money to you. Rarely in life will such a bonus come your way, so it is utterly vital you take advantage of it. After you have hit the match limit, it is time to decide if you should keep contributing or use those dollars elsewhere. This is where having a dedicated fiduciary advisor, who can balance the effects of spreading your retirement savings across a portfolio, can truly make an impact.
Open an Individual Retirement Account
You should always be fueling your retirement with multiple vehicles. An Individual Retirement Account is the first step toward this objective. It is a good idea to start funding as soon as possible – as soon as you get your first job – as everyone is subject to an annual contribution limit that can never be made up. With each passing year, the funding opportunity has disappeared. Here is where you have to make a choice between the Roth and Traditional IRA. When I first started there was just an IRA, so it was an easy choice, but the Roth option has clearly become the better route. It is a decision between paying taxes now on your initial investment and never paying taxes again or getting a tax break now but letting the government take a portion of your retirement savings in the future.
Take half of every pay increase and bonus and put it away
Pay raises and bonuses are great and usually come with more responsibility. Incorporating all of your newfound money into your lifestyle is a plan for failure. After you get the raise, look at your pay statement from before and after, and calculate the difference after taxes. Enjoy half for a new car or trip. Save the other half to pay down debt faster, increase savings or invest more. You will never miss it and your house will be less full of stuff you do not really use. And, the more you make, the more you will have to save to replace your new lifestyle. There is a balance – live for today, plan for tomorrow.
Find other ways to earn tax-free income
Although not what first comes to mind when thinking of ways to save more for retirement, life insurance offers many of the same benefits as a tax-advantaged retirement plan. Products such as Indexed Universal Life Insurance, if funded correctly, can build significant cash value to provide you with tax-free income in retirement. There is an added benefit to this type of product in that the money accumulated is not in the market and cannot go down!! If the market crashes, you will never lose any money you have earned. This makes the IUL attractive to banks, which in some cases will help you fund a larger policy to leverage a greater cash value, in a play known as premium financing. Particularly impactful for those that are behind the savings bell curve, premium financing can triple your ability to save for retirement.
Reduce your losses by building a diversified portfolio
Taking advantage of the many ways to save for retirement is a great start to increasing your personal savings rate, but mitigating losses is absolutely necessary to achieve your retirement goals. Within your retirement portfolio, you should know your risk tolerance and you should always strive to reduce risk through diversification. This is accomplished by distributing your investments across many different asset classes. Once a financial advisor knows your risk number, they can analyze your current portfolio and propose strategies that tie your returns to negatively correlated investments. This will reduce your total risk by helping you avoid devastating losses due to one underlying factor.
Closing thoughts
Fund your 401k/TSP up to the matching amount. Start a Roth IRA. Use a professional to assist you in getting your risk number and matching a diversified portfolio. Make a plan. Mission Critical FPI specializes in coaching people, families, and businesses to RETIRE HAPPY!! Contact us today for a free, no obligation 30 min call, or a risk number analysis of your portfolio.
