Thoughts on Saving for Retirement…

Here are some thoughts based on questions I am routinely asked pertaining to saving for your retirement…

Reinvest Dividends & Capital Gains

When purchasing long-term investments, always choose the option to re-invest the dividends & capital gains. Folks who do not chooses this option (or may not even know it exists) can easily end up with a stack of cash that is languishing as uninvested capital. When you re-invest dividends and capital gains it will increase your compounding power as that cash the investment throws off is automatically used to buy new shares without you having to even lift a finger. 

Once you reach a time where you need the income, you can disable this option. The goad then is to let your investments pay your living expenses by way of the income they produce.

Cash as an Investment

Speaking of cash, I have written about this before. Many accounts will use a “sweep feature” that pays a paltry 0.1% or so on your cash. The investment bank likes to turn around and lend your cash out for 4% or more. Don’t let them do that to you. Where possible, invest your cash in money markets or similar products. Current rates on cash should be somewhere between 2-3% depending on how much cash you have and where can you put it. 

Target Date Funds

Target date funds are a great set-it and forget it investment that are found in most every 401k. They are a great option if you don’t really want to go beyond basic investing – which is totally fine. They are easily accessed in Roths and traditional IRAs as well. Once you estimate the date of your retirement, the fund will do the rest. The investment allocation within the fund will begin with an aggressive blend of stocks, and then rotate to more a conservative mix of stocks and bonds as you near retirement.

Here’s a trick – if you want to be more aggressive, set your target date 10-15 years beyond your estimated retirement date. Alternatively, if you want to be more conservative, set your target date 10-15 years before your estimated retirement date. 

Take the Match

Speaking of 401ks, take the match! If your company offers a match, take them up on their offer. Many companies will match a percentage of your first 6% in contributions. Some will match up to 100% on your first 6%. Do not turn this down!

Saving Rate

Staying on the 401k theme, most workers will see a nominal 3% raise every year. Use this opportunity to increase your contributions by 1 to 2%. Doing so will keep your take home pay consistent or maybe slightly increased to handle inflation.

If you score a promotion, bonus, or new job, crank up your contributions even more in order to match your new income level. This will keep lifestyle creep from consuming your paycheck and allow your 401k consume it instead. Doing so will help you gain financial independence much sooner than you may think.

Account Mix

Save in the correct order to maximize your efforts. You should be saving at least 15-20% of your income toward retirement. Start with that 401k at 6% and grab the match. Then go to a Roth IRA and max it out if you can (currently $6,000/year). The Roth guarantees tax-free income when you retire while giving you total control of your investments. After that, come back to your 401k and add more there if possible. If you can max that out as well ($19,500/year), then I tip my hat to you. Talk to a tax advisor about other possible options beyond that. You can explore options like a Back-door Roth or using an HSA as a savings/investment vehicle.

Tracking Your Allocations

If you have multiple retirement accounts, make sure your allocations make sense. Buying a bunch of stuff in a bunch of different accounts is an easy way to end up with one of two things. One, you can end up with a giant portfolio that has no strategy, high costs, and is poor-performing relative to the total market. Two, you can end up with extra risk by being over-exposed to certain sectors or certain stocks where your funds may overlap. This can lead to crucial moves in the market really dinging your returns.

Tip – if you have multiple accounts across multiple brokerages, keep a spread sheet to track your allocation amounts. You can enter the stock, ETF, or fund symbol and the spread sheet will important the share price data daily. Once per quarter, simply update the amount of shares you own in each account and a simple spreadsheet calculation will display your total allocation percentages across all accounts. 

Fees Are Your Enemy

I harp on fees all the time. Fight to keep your fees as low as possible. Don’t buy expensive mutual funds that can’t keep up with the broad market. Don’t pay annual fees for an IRA when so many brokers offer free accounts. Don’t pay 0.5% a year for an index fund when you can pay 0.02%. Fight to shave off every basis point you can shave. Be very diligent here.

Conclusion

So these are just a few thoughts on saving for retirement. As we roll into the New Year I hope these may help if one of your goals is to starting taking steps toward securing your future. If you’ve already started, then keep going and I hope these come in handy. Cheers, and thanks for reading!

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