Retirement planning is a crucial aspect of personal finance and should not be overlooked. This involves planning for your expected retirement needs that you’ll have during your golden years. You’ll need to do this to supplement Social Security because the amount of money you get from the government will simply not be enough to live on comfortably. Most people are underfunded in retirement accounts so it’s essential to start planning and saving for retirement as early as possible as it takes time to build a significant retirement nest egg. Here are some simple strategies to maximize your retirement accounts:
First, start early
The sooner you start saving for retirement, the more time your money has to grow. Starting early can provide you with a significant advantage in building your retirement savings. This is due to the power of compounding, which enables your money to grow over time, i.e., your earnings earn more earnings. The average rate of return of the S&P, with reinvested dividends from January 1,1993 to December 31, 2022, was 9.62%. This is based on the total return index of the S&P 500. If you have a 401(k) plan, contribute as much as you can, up to the annual maximum. The more you save, the more money you will have for retirement. Another benefit of maximizing your 401(k) contributions is that the money you put into the traditional 401(k) is pretax, so it has the added benefit of reducing your taxable income. If you don’t work at a company that offers 401(k) benefits, there are other vehicles you can use such as traditional Individual Retirement Accounts (IRAs), ROTH IRAs, and Deferred Compensation plans, just to name a few. Plus, one of the best benefits of all retirement plans is the tax-deferred nature of qualified retirement plans, i.e., you don’t pay taxes on realized gains and you only pay ordinary income on withdrawals. Tax deferral removes a massive drag on your money that is otherwise present in saving for retirement in ordinary taxable accounts. The distinctions in these plans can be found online or by asking your advisor.
Take Advantage of Employer Contributions
Many employers offer a matching contribution to their employees’ retirement accounts. If your employer offers this benefit, make sure you contribute enough to get the full match. This employer matching is essentially free money and can significantly increase your retirement savings. It is important to fully understand the benefit your employer is offering as it varies from company to company.
Diversify Your Investments
Diversification is crucial in managing risk and maximizing returns. Invest in a mix of stocks, bonds, and other assets that align with your goals and risk tolerance. Consider using low-cost index funds or target-date funds to achieve diversification. There are many choices that are available to you now, so educate yourself as to what these choices are. It is advisable to have a larger allocation to stocks when you are younger, as you have a very long time before you will be taking distributions from these plans.
Keep Fees Low
Fees can eat into your investment returns over time. Be aware of the fees associated with your retirement accounts and choose low-cost investment options where possible. For example, choose index funds or exchange-traded funds (ETFs) with low expense ratios.
Rebalancing your portfolio involves adjusting your investment mix periodically to maintain your desired asset allocation. It helps manage risk and maximize returns. Rebalancing can be done annually or semi-annually, depending on your investment strategy. Try not to fall into the trap of “TRADING” your account by buying and selling frequently.
Delay Social Security if You Are Able To
Delaying Social Security benefits can increase your retirement income significantly. You can start collecting Social Security benefits as early as age 62 but delaying until age 70 can increase your monthly benefit by up to 8% per year. The information as to what your Social Security Benefits will be is easily available on the Social Security Website. There is a tool on the site that will allow you to model out your benefits depending on when you start to take your social security. In most cases, unless you need the money, delaying when you begin to receive your social security is beneficial. This is something your advisor can help you with.
Consider a Roth IRA
A Roth IRA is an excellent retirement savings vehicle that offers tax-free withdrawals in retirement. Contributions to a Roth IRA are made with after-tax dollars, and qualified withdrawals in retirement are tax-free. There are many advantages to using a ROTH IRA and if your employer offers a ROTH 401(k), it is worthwhile considering as these funds are always going to be tax free when you take distribution. The primary difference is you are using after-tax dollars to fund this. Again, these are decisions you should discuss with your advisor.
Get Professional Help
Consider working with a financial advisor or planner to help you develop a retirement plan that aligns with your goals and objectives. A professional can help you develop a personalized plan and provide valuable guidance on investment strategies, risk management and tax planning.
In summary, maximizing your retirement accounts requires a disciplined approach to saving, investing, and managing risk. Starting early, contributing the maximum, taking advantage of employer contributions, diversifying your investments, keeping fees low, rebalancing regularly, delaying Social Security, considering a Roth IRA, and seeking professional help are all strategies that can help you achieve your retirement goals. With consistent effort and discipline, you can maximize your retirement accounts and enjoy a financially secure retirement.
Rebecca Rothstein works with high-net-worth individuals, families, and institutions, helping them advance their wealth management goals. She began her career as a financial advisor in 1987 at Bear Stearns. She spent 10 years with Deutsche Bank Alex Brown and 13 years with Morgan Stanley Private Wealth Management (formerly Smith Barney) before joining Merrill Lynch. As a Managing Director at Merrill Private Wealth Management, Rebecca focuses on wealth management, tax minimization, and estate planning strategies for affluent clients. She also works with corporate officers, devising liquidity and diversification strategies for concentrated positions. Rebecca has garnered a number of national honors as a financial advisor. Barron’s magazine named her one of the “Top 100 Financial Advisors in America” from 2007 successively through 2012. Barron’s also named Rebecca one of the “Top 100 Women Financial Advisors in America” from the inception of the list in 2006 successively through 2012, profiling her in the 2012 issue. In 2017, Rebecca was recognized by the national publication Forbes, which named her one of “America’s Top Wealth Advisors.” In 2018, 2019, 2020, and 2021 Rebecca was again recognized by Forbes, which named her the #1 of “Top Women Wealth Advisors.” Rebecca is very active in the community. She is the Chairman of the Board and Founder of Teen Cancer America (a global charity founded by Roger Daltrey and Pete Townshend). She is also a Co-Chair of the Childhood Autism Board at UCLA, which helps children who have been diagnosed with autism, developmental disabilities, and behavior disorders, and she is a board member of the UCLA Health System. In her free time, Rebecca enjoys cooking, sailing, and participating in a number of charitable efforts. She has four sons and splits her time between Incline Village, Nevada and Beverly Hills, California with her husband Ron.