Few would say saving for retirement is a snap, but it has been even more difficult than usual over the past two years. Many Americans had to stop their pension contributions when they were out of work, and some even drew on their savings early. It is a recipe for enormous financial stress.
If you’re ready to get out of this worry and get your retirement plan back on track, start by doing the following five things in 2022.
1. Take stock of where you are
Examine your retirement accounts and note their current balances, as well as the amount of your monthly contributions. Also be careful about what you invest in, especially the fees associated with those investments. For those who invest in mutual funds, your fees will take the form of an expense ratio. This is the percentage of total fund assets that you pay to the fund manager each year.
Knowing this information is crucial because you can’t figure out how much to save per month until you know what you already have. Don’t forget to also check the old retirement accounts of former employers. Consider transferring them to an IRA or your current 401 (k) so you can manage your funds in one place.
2. Determine how much more you need
Hope you have an idea of how much you need to cover your retirement expenses. If not, now is the time to find out. Think about when you plan to retire and how long you plan to live. Next, estimate how much you will spend annually in retirement.
A retirement calculator can help you do that, and it will tell you how much you need to save per month to reach your goal. Most also have a space for you to enter how much you already have in savings.
You will need to estimate the rate of inflation as well as the rate of return on your investments to achieve a specific savings goal. Use 3% per year for inflation. Many calculators already do this. For the rate of return on your investment, use 5% or 6% per annum. It is possible that your money will grow faster than this, but you don’t want to be overly optimistic and end up failing.
Once you have your monthly savings goal, decide if it’s realistic. If so, go to the next step. Otherwise, see if you can make any changes. Consider delaying retirement for a few months or years, or changing your budget today to free up some extra cash. Keep exploring different options until you find a plan that’s right for you.
3. Choose the right accounts
A 401 (k) is the best place to put your savings first if you qualify for a business match. But if you don’t get a match, or you’ve already claimed it, an IRA might be a better choice. It has lower annual contribution limits, but it also gives you more freedom to choose what you want to invest in. Plus, you can decide whether you want to pay taxes up front or wait until retirement.
If you’re eligible, you might want to explore other options, like Health Savings Accounts (HSA) and Self-Employed Retirement Accounts, to see if these are worth adding as well. to your retirement plan.
4. Choose the right investments
Also reassess what you are investing your money in. Try to keep your expense ratios below 1% whenever possible so you don’t lose too much of your expense savings.
If you do decide to invest in individual stocks, be sure to spread your money among at least 25 different companies in a few different industries. This will help reduce your risk of loss.
Make sure to reassess your portfolio a few times a year to make sure it stays balanced and still matches your risk tolerance. Over time, you’ll want to gradually move your money away from stocks to bonds and other safer investments to protect what you already have.
5. Make regular contributions
Once you have a plan in place and know where you want to put your money, all you need to do is start contributing. It is best to automate this process if you are able to do so. This will reduce the risk that you forget to set aside funds for retirement.
Those with 401 (k) should be able to designate how much they want to withhold from each paycheck, and many IRA providers will allow you to link a bank account and set up an automatic transfer schedule. .
If you stick to this plan for the whole of 2022, you should be making real progress towards your retirement goals. Then, at the end of the year, redo these steps and make the changes needed to keep you on the right track.