Now is a great time to get a head start on your New Year's resolutions for 2018 by doing some retirement planning. If you've fallen behind on your retirement savings, or worse yet, don't know how much you're on track to save or how much you'll need to save, here are five suggestions you can implement before the end of the year to get your retirement strategy moving in the right direction.
Check your Social Security statement
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There are likely two main components to the income you'll have after retirement: your savings and Social Security. So, in order to determine how much income you'll need from your savings, which we'll get to in the next section, you'll need a good estimate of how much you can expect from Social Security.
One good way to do this is by checking your annual Social Security statement, which should be updated by now with the information from your 2016 tax return. Based on your actual earnings history, your Social Security statement can provide you with an estimate of how much you can expect per month (in today's dollars) at full retirement age, as well as if you choose to claim your retirement benefit early or late.
In addition, your Social Security statement contains other valuable information, such as your eligibility for disability and survivor's benefits, Medicare, and more. You can access your Social Security statement by creating an account at www.ssa.gov if you haven't done so already.
Figure out your retirement number
Most Americans don't know how much money they'll need to retire comfortably, but it's an important number to know. If you know how much you should aim to save, you'll have a better idea of where you stand and whether you need to make adjustments to your savings.
There's no one-size-fits-all method for determining your retirement number, but here's a quick method using some general rules of thumb.
- You'll need 70%-80% of your salary after retirement, according to most experts, so to be safe, use the higher end. Multiply your current income by 80% (0.8).
- Some of your income will come from Social Security, and we discussed how to get a good idea of yours in the last section. Multiply this by 12, and subtract it from the income need you calculated.
- The 4% rule of retirement says to multiply this amount by 25 to determine your retirement number (in today's dollars).
- To adjust for inflation, multiply by 1.03 (the approximate historic average inflation rate) for each year between now and when you plan to retire. This can be done exponentially -- for example, if you plan to retire in 10 years, you can find your inflation factor by raising 1.03 to the 10th.
Boost your retirement contributions
The most obvious move to make -- and the most time-sensitive on the list -- is to consider increasing your retirement contributions if you aren't quite on track to reach your retirement number.
I generally suggest that individuals should aim to save at least 10% of their compensation in tax-advantaged retirement accounts (401(k)s, IRAs, etc.), not including any employer-matching contributions. This may seem like a lot, especially if you're used to contributing say, 5% to get your full employer match, but you don't need to just increase it dramatically right away.
Common and effective strategies include increasing your contribution percentage by 1% per year until you reach your desired contribution rate, or increasing your rate whenever you get a raise.
Typically, 401(k) and similar employer-sponsored plan contributions must be made before the end of the calendar year, so there's limited time if you want to boost your savings and potentially lower your taxable income for 2017. 2017 IRA contributions can be made until the April 2018 tax deadline, so they're not quite as time-sensitive.
Rebalance your portfolio
One checkup you should do every so often is to take a look at your asset allocation and determine whether it's still in line with your objectives. Known as rebalancing, this is especially important after the stock market has gone up (or down) by a considerable amount.
Consider this simplified example. Let's say that five years ago, you determined that your ideal asset allocation is 75% stocks and 25% bonds. Well, in that time, the S&P 500's total return has been 103%, while the Vanguard Total Bond Market ETF has returned just 10.6%. This means that your portfolio would now be 85% stocks and 15% bonds, excluding new contributions.
In other words, your portfolio would have become far too dependent on stocks. Before the end of the year, take a few minutes and check if your asset allocation in your retirement accounts is still in line with your goals.
Check your investment fees
Few factors can destroy your investment returns over time as much as excessive fees can. I've written before that the worst 401(k) funds you can choose are those with fees higher than other choices that accomplish roughly the same objectives.
So, it's a good idea to take a few minutes and compare the fees associated with your retirement investments. These are listed as "expense ratios" in your retirement plan or mutual funds' literature, and are the total fees of these investments, expressed as a percentage of your assets per year.
The key thing to determine is if there are lower-cost options that also meet your goals. For example, if you're invested in a large-cap stock fund with a 1% expense ratio, but your fund offers another large-cap stock fund with a 0.6% expense ratio, it can be a good idea to take a look at that one as a possible alternative.
This may sound like a trivial difference, but consider this. If you invest $10,000 in a stock mutual fund that matches the S&P 500's historic returns, you'll have $115,582 after 30 years if the fund's expense ratio is 1%. However, if the expense ratio is 0.6%, you'll end up with $129,073 -- almost $13,500 more. That's why knowing your fees is so important.
Five important things to do regularly
If you're looking to do some year-end retirement planning, these five steps can help you determine how much money you'll need to retire, assess where you stand, and take appropriate action. They'll also help you make sure you're not taking on too much (or not enough) risk, and ensure that you're not overpaying for your investments.
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