Top 4 Ways to Improve your Retirement Score
There are many forms of THE question. What’s my retirement number? Can I retire based on what I’m doing? How much money to do I need in the bank? How long do I have to work? Retirement is not the end-all, be-all for financial planning, but these are the types of questions we hear from clients who are new to the practice of financial planning. Very rarely is a retirement goal based on the ability for one to simply put their feet up and not do ANYTHING with their time. Much of retiree’s driver is having the ability to fully pursue hobbies and passion projects, travel more, philanthropy, spend quality time with grandchildren, and the most common one we hear, just not work so much. We approach retirement and financial planning with these important goals in mind, and there are 4 very simple things you can do to improve the outcome of achieving your goals.
1) Save more money
If your portfolio stress test shows a shortfall in your retirement plan, the best option is to look for tax-efficient ways to save for money that can be earmarked for your retirement goal. Max out 401(k)s, IRAs, and HSA accounts for tax deductions. If you have extra cash each month, save and invest it in a brokerage account that can be used in addition to your employer retirement plan.
2) Work longer
If your essential and discretionary living expenses count for only a small percentage of your income; that gives you the ability to save a large portion of your income that’s not spent on taxes. For example, as you approach retirement, it’s very likely that you’ve paid off debt such as a mortgage, student loans, car loans, and dependent children are out of the house. As your career advances, income tends to go up as well. Meaning that the few years prior to retirement give individuals the unique ability to have a high amount of income, and a lower spend rate. The amount of money saved each year can add years onto a successful retirement plan.
3) Spend Less
Many financial planners these days build retirement scenarios using baseline assumptions. These assumptions often cover areas such as mortgage or rent payment, grocery & utilities bills, rate of return on your investments, Social Security income, how long you’ll live, etc. The most important assumption is how much the retiree will be spending each month to maintain their lifestyle. If lifestyle creep has overtaken a retiree’s financial situation, the first recommendation will be to thoroughly revisit their budget. If the budget needs to be maintained as-is, then it’s up to the other 3 levers to create a successful financial plan through stress testing.
4) Change your investment strategy
This is the most immediate action you can take. We often refer to risk tolerance as a spectrum ranging from too conservative to too aggressive. On the too conservative end you have investors who put all their money in a mattress where it’s at risk of losing value to inflation. On the other end are people who invest in areas such as penny stocks hoping for a get rich quick outcome. It’s important to stress test your portfolio to ensure that you have the most appropriate risk-level for your current situation. People who are young and earlier in their career can take the most amount of risk as they have a long investment horizon; whereas retirees who are actively drawing on their portfolio don’t have the ability to ride out the swings of the market. Stress-testing can provide insight as to whether someone is being too risky or too conservative while also being able to show hypothetical benefits and outcomes for a more appropriate investment allocation.
DISCLOSURES:
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
Although bonds generally present less short-term risk and volatility risk than stocks, bonds contain interest rate risks; the risk of issuer default; issuer credit risk; liquidity risk; and inflation risk.
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The information contained above is for illustrative purposes only.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
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