If you're worried about retirement, you're not alone. Only 32% of Americans said they were very confident that they could live comfortably throughout retirement, according to the 2018 Retirement Confidence Survey of the Employee Benefit Research Institute.
Fortunately, it's within your power to make some moves now and in the future that can make your retirement more comfortable. Here are five powerful retirement tips for 2018 -- and beyond.
1. Get out of debt
Having a mortgage or a low-interest-rate car loan or student loan is generally fine, but many people are walking around with long-term debt on their credit cards, for which they're being charged interest rates of 15% to 25% and sometimes even 30%! If you're saddled with, say, $15,000 of debt, a 25% interest rate can cost you around $3,750 each year. That kind of burden can make it hard to get ahead financially -- and carrying debt into retirement, when you're trying to make your nest egg last, is especially risky.
Make paying down your debt a priority. Even if your only debt is a low-interest-rate mortgage, consider paying that off before you retire, too. Not having mortgage payments due each month while you're on a limited income can make retirement less stressful.
2. Form a plan
Many people are socking money away for retirement but without a plan. They're essentially hoping for the best, not knowing whether they're saving enough. Leaving everything to chance rarely works out well. Figure out how much money you'll need in retirement and how you'll amass it. Determine and plan for what your income sources will be in retirement, too -- such as Social Security, savings, pension income, and so on.
Tax-advantaged IRAs can be a big help as you save. In 2018, you can contribute up to $5,500 to one or more traditional or Roth IRA(s) -- in total. If you're 50 or older, the limit is $6,500. With a traditional IRA, a $5,500 contribution will reduce your taxable income by $5,500 -- saving you $1,375 if you're in the 25% tax bracket. It can be invested and will grow on a tax-deferred basis until it's taxed when you make withdrawals in retirement. With a Roth IRA, a $5,500 contribution has no effect on your taxes in the contribution year. But follow the Roth IRA rules, and you'll be able to withdraw all your contributions and earnings tax free! If your Roth IRA swells to $300,000 over 20 years, that can all be tax-free income in retirement.
Make the most of your 401(k) or 403(b) account, too. They sport much higher contribution limits than IRAs -- for 2018, the limit is $18,500, or $24,500 for those 50 or older. At a minimum, contribute enough to your 401(k) in order to grab all available matching dollars from your employer. That's free money, after all. A common match is 50% of your contributions, up to 6% of your salary -- meaning that if you earn, say, $80,000 per year and contribute $4,800 (6% of your salary) to your 401(k), your company would chip in an additional $2,400. Free money.
3. Save aggressively and invest effectively
Don't make half-hearted contributions to your retirement account(s), either -- especially in your early working years. Your first invested dollars have the longest time in which to grow, after all. The more you can save, the better off you'll be in retirement -- especially if you're still many years from retiring. The table below shows how much you could amass if your nest egg grows by an annual average of 8% annually:
It's not enough to just save a lot, though. If you save a lot but just keep that money under your mattress or in a savings account paying 2% interest, it will be hard to build any wealth. The stock market is a great wealth builder for long-term money. Aim to only hold stock in companies that you have researched, kept up with, and have great confidence in. If you don't have the ability or interest to be an active investor, just opt for one or more low-fee, broad-market index funds. The SPDR S&P 500 ETF (NYSEMKT: SPY), for example, will distribute your money across the 500 companies in the S&P 500, which make up about 80% of the U.S. market. The table below shows what a difference your money's growth rate can make to annual investments of $10,000:
4. Consider a wide range of income sources
It's great to have a growing nest egg, but you need to have a plan for how all that money will provide your needed income in retirement. Will you just sell off pieces of it over time? Or will you park some or all of it in income-generating investments?
Consider creating your own pension-like dependable income stream by buying an immediate annuity (as opposed to the more problematic variable or indexed annuity). You might be surprised at how much income you can buy through an annuity -- and the amounts you're offered should increase whenever interest rates rise, too. Here's the kind of income that various people might be able to secure in the form of an immediate fixed annuity in the current economic environment:
Another good way to generate retirement income is through healthy and growing dividend-paying stocks -- after all, they can keep paying you money without your having to sell the shares themselves. Researchers Eugene Fama and Kenneth French, studying data from 1927 to 2014, found that dividend payers outperformed nonpayers, averaging 10.4% annual growth vs. 8.5%. If you have $300,000 in dividend payers with an average overall yield of 4%, you're looking at $12,000 in annual income -- that's $1,000 per month. Plus, dividends tend to be increased over time, while stock prices can grow, too.
5. Have a smart Social Security strategy
Finally, be sure to make smart Social Security decisions. There are a bunch of ways to increase your Social Security benefits. For example, you might work the formula that the Social Security Administration uses to compute your benefits. It's based on your earnings in the 35 years in which you earned the most, so if you only earned income in 29 years, the formula will be incorporating six zeros, which will shrink your benefits considerably. Are you planning to retire after 32 years of work? It might be worth it to work three more years if you want to get more benefits. Even if you've worked 35 years, if you're now earning much more than you have in the past (on an inflation-adjusted basis), you might consider working for another year or two, as each high-earning year will kick a low-earning year out of the calculation.
Consider spousal strategies, too, if you're married. You might, for example, start collecting the benefits of the spouse with the lower lifetime earnings record on time or early while delaying starting to collect the benefits of the higher-earning spouse. That way, you both get some income earlier, and when the higher earner hits 70, they can start collecting extra-large checks. Also, should that higher-earning spouse die first, the spouse with the smaller earnings history can collect those bigger benefit checks.
Note, too, that even divorcees can collect benefits based on their ex's earnings history -- if they were married for at least 10 years and have not remarried. Also, spouses can collect "spousal benefits" based on the other's earnings history, getting up to 50% of that spouse's benefits, while most widows and widowers can choose to start receiving 100% of their late spouse's benefit instead of their own.
Your retirement can be difficult, comfortable, or fabulous -- depending on how well you prepare for it and how much income you can set yourself up to receive. Know that you don't have to plan for your retirement all on your own. It can be well worth spending a little money consulting a financial advisor. Advisors designated as fee-only won't be looking to earn commissions from selling you products, and you can seek one at napfa.org. Yes, you might pay several hundred dollars or more, but a good pro could save you much more than that.
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