Retirement isn't something you can prepare for on the fly. Unfortunately, it's something that many Americans tend to procrastinate over.
According to Transamerica's 17th annual retirement survey, 37 percent of workers don't have a fleshed-out retirement strategy in place. Furthermore, a 2016 Gallup poll revealed that just 52 percent of Americans are investing in the market.
"Most people don't do enough planning around what they think they'll need for retirement," says Phil Simonides, senior vice president at Philadelphia-based McAdam Financial. "Investors need to think about their actual goals and the vision they have for what they want to accomplish."
If you've delayed formulating your retirement investing plan, there's no time to lose.
Pinpoint your savings goal. As you're putting together your retirement strategy, the first thing you must ask yourself is this: how much do I need to save? This is a critical question, says Chris Schaefer, head of MV Financial's retirement plan practice group in Bethesda, Maryland.
"It's extremely important to have a target retirement number in mind," Schaefer says. "It comes back to the basics of goal setting. If you don't know where you're going, how are you going to know how to get there?"
Schaefer says one of the most important elements of quantifying your savings target is having an estimate of what your annual retirement expenses are going to be. Mocking up a budget that reflects how much you expect to spend on things like housing, transportation and health care is a good place to begin.
Shane Eighme, a partner at Shane and Shane Financial in Dublin, Ohio, says it may be helpful for investors to take a broader, rather than a narrower view, when thinking about how much money they'll need. "I think it's more important to have a range, rather than a specific number," Eighme says.
He advises investors to focus on the lifestyle they hope to enjoy in retirement, not just a set dollar amount of savings.
Once you have an idea of what kind of goal you should be shooting for, the next step is determining how much you need to save monthly or annually to get there. Breaking your goal down into smaller pieces makes the task of achieving it less intimidating.
Choose your asset allocation. Setting aside money in a CD or savings account is safe but it won't generate the same level of returns that investing may offer. If you've avoided the market thus far, it's time to consider what you're most comfortable investing in.
Schaefer says there are several things investors need to keep in mind when building their portfolios.
"Age and time horizon are important factors but investors should also consider their risk tolerance, how far along they are in achieving their goals, their savings rate and life expectancy," he says.
Jake Serfas, leading financial strategist at O'Dell, Winkfield, Roseman and Shipp in the District of Columbia, says it's important to keep risk in perspective as you choose investments.
"One rule of thumb Wall Street has taught is that you can take more risk in your early years and as you get older, move to safer investments with lower rates of return to minimize the odds of losing money," Serfas says.
Serfas says that retirement is about saving and investors don't necessarily need to assume greater risk just because they're younger. He says that saving early and often can be a more powerful predictor of your long-term investment success than focusing solely on risk.
That doesn't mean, however, that you can avoid stocks entirely. It's all about striking the right balance.
"There's simply no substitute to investing in stocks when saving for retirement," says Marc Doss, regional chief investment officer for Wells Fargo Private Bank in San Diego, even if that means riding out market downswings. "Numerous studies show that investors who stay fully invested during market declines are the most successful," Doss says, and investors must be committed to seeing their stock investments through over the long haul.
Understand the difference between tax-advantaged and taxable investments. What you invest in matters but where you put those dollars also has an impact on your retirement future.
"Asset location is as important as asset allocation," says Manuel Andrade, senior vice president at People's United Wealth Management in Bridgeport, Connecticut.
Andrade says that taxable accounts are better suited for highly appreciating assets that will take advantage of long-term capital gains tax treatment, versus ordinary income taxed investments. Tax-advantaged or tax-deferred accounts, on the other hand, are better for investments that have high income but offer less in capital appreciation.
Schaefer says investors need to look beyond investment diversification and consider tax diversification when plotting investments. "Since we have no idea what tax rates will be in the future, it's important to have different tax buckets to pull from so that retirement distributions can be made in the most tax advantageous manner," he says.
Utilizing a mix of traditional tax-advantaged accounts and Roth accounts is an effective way to diversify from a tax viewpoint. Spreading out your tax liability over different accounts can be particularly helpful if one of your goals is to pass on some of your wealth to future generations.
ReKeithen Miller, a certified financial planner with Palisades Hudson Financial Group's Atlanta office, reminds investors that investments in tax-advantaged accounts are best left alone until retirement.
"A common mistake I see people making is cashing out their retirement accounts when they change jobs instead of rolling them over into the new employer's plan or opening an IRA," Miller says. "Not only are they forgoing the tax-deferred growth in the accounts but if they're below age 59½, they could face tax penalties on the withdrawal."
Start small if you have to, but get started. Creating your retirement plan in your 40s or 50s versus your 20s or 30s is likely to be a more daunting task but you can't let that deter you from making headway.
"For people who have a lot of catching up to do, the first area of opportunity is maxing out their retirement plans if they're not already doing so," says Stephanie McElheny, manager of financial planning for PNC Investments in Pittsburgh.
McElheny says small adjustments can make a big difference in retirement outcomes. "Reduced spending, increased savings, delaying retirement by a few years, all of these combined can have a much more positive effect than you might expect," she says.
The worst thing investors can do is nothing.
"It's never too late to make an impact," Simonides says. "Burying your head in the sand will never make things better, no matter how late to the game you are."
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