The 2 Retirement Planning Resolutions You Really Need To Make For The New Year
When it comes to New Year’s financial resolutions, saving more is a perennial favorite, as Fidelity’s 8th Annual Resolutions Study shows. And that’s fine, except resolving to save more may not be very effective if “more” still falls far short of being “enough,” or if you aren’t investing your savings properly. Which is why if you want to be really serious about making sure you’re doing all you can to achieve a secure retirement, I recommend you put these two key resolutions at the top of your list.
Resolution #1. Give yourself a “Where do I stand and how can I improve?” retirement check-up. Unless you go through the process of confirming how much you already have saved, how much you’re adding to your nest egg each year and then estimating whether you’re likely to end up with the savings you’ll need if you continue along your present path, you’re not really planning for retirement. You’re just winging it.
Fortunately, getting a decent handle on how well you’re doing and how you might boost your retirement prospects doesn’t require a Herculean effort. For example, if you go to a online tool like T. Rowe Price’s retirement income calculator (which you’ll find in RealDealRetirement.com’s Tools & Calculator’s section), plug in your retirement account balances, the percentage of salary you’re saving each year, the age at which you hope to retire and how many years you expect to spend in retirement, and you’ll get an estimate of your probability of building a nest egg large enough to support you throughout retirement.
If your chances are lower than you’d like—I’d say you probably want a success rate of at least 70%, if not higher—then you can see which adjustments can tilt the odds more in your favor. Generally, bumping up your savings rate is the single most effective thing you can do, although staying on the job a few more years, working in retirement or scaling back your anticipated post-career spending can also help.
If you’re already retired or on the verge of retiring, you can do the same analysis, except that instead of plugging in your savings rate, you’ll provide information about how much you expect to spend in retirement. The tool will then estimate the chances that annual withdrawals from your portfolio, plus income from Social Security and pensions, if any, will be able to generate the income necessary to sustain your projected spending throughout retirement.
The tool’s default assumption is that you should spend during retiring as if your nest egg will have to support you to age 95. You can change that assumption, but given today’s longer lifespans, I think 95 is prudent. If you’d like a second opinion, however, you can get a more tailored estimate of how long you might live based on your age, sex and state of health by going to the Actuaries Longevity Illustrator tool. The main thing, though, is to arrive at a level of spending that won’t deplete your nest egg while you’ve still got a lot of living to do.
Resolution #2. Do a thorough review of your retirement investments. Start by making sure your retirement savings are invested in an appropriate blend of stocks and bonds—that is, enough in stocks to generate the returns you’ll need to build an adequate nest egg (or, if you’re in or nearing retirement, to support your spending needs) but also enough in bonds to give your portfolio some downsize protection during severe market downturns.
One way to arrive at a stocks-bonds mix that makes sense for you is to complete a risk tolerance-asset allocation questionnaire like this free version Vanguard offers online. Answer 11 questions designed to measure how long you’ll keep your savings invested and how much volatility you’re willing to accept, and the tool will not only suggest a mix of stocks and bonds that jibes with your tolerance for risk, but show you how that mix and others more aggressive and more conservative have fared in the past.
You’ll also want to make sure that your stock and bond holdings are broadly diversified and not overly concentrated in a few areas. In the case of stocks that means having exposure to stocks of all sizes, styles and market sectors (large and small; growth and value; technology, financials, consumer stocks, etc.), while for bonds you want to own Treasuries and other government issues as well as investment-grade corporates. You can get a sense of whether your retirement portfolio overall is sufficiently diversified by plugging the names or ticker symbols of your various funds into Morningstar’s Portfolio Manager tool (available free with registration through the Tools and Resources section of T. Rowe Price’s site) and then clicking on the Overview, Stock Style and Bond Style views.
Finally, you don’t want to give up any more of your investment return than necessary to fees. You can search for low-cost funds (and see how the expenses of your current funds’ compare) by going to Morningstar’s Fund Screener tool. Or, even simpler, you can stick as much as possible to broad based stock and bond index funds or ETFs, many of which charge 0.20% or less a year in annual expenses. The point, though, is that the more you hold the line on annual investing costs, the bigger the nest egg you’ll likely be able to build during your career and the more spending cash you’ll be able to draw from it during retirement.
If after doing this review you find your stocks-bonds mix is where it should be, your holdings are reasonably diversified and you’re not overpaying in expenses, great. Your portfolio’s in shape. If that’s not the case, though, then you may need to do some re-jiggering to bring your portfolio up to snuff. Any moves you make within tax-advantaged accounts like 401(k)s and IRAs won’t have tax consequences. But if you buy or sell within taxable accounts, you could end up with taxable gains or deductible losses. To see how you may be able to minimize your tax bill by pairing losses with gains or possibly even deducting up to $3,000 of losses each year against ordinary income, check out IRS Publication 550. Your main goal, though, is to get to a diversified portfolio that reflects your tolerance for risk.
If you’re not comfortable doing this sort of retirement check-up and portfolio review on your own, you can always consult a financial adviser. But one way or another, these are two retirement planning resolutions you want to make and keep for the New Year. (12/21/16)
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Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at firstname.lastname@example.org. You can tweet Walter at @RealDealRetire.