For most people, retirement seems a long way off, but that's no excuse to slack off. If you might be behind, follow these tips to kick-start your savings.
For most people, retirement seems a long way off. Perhaps that’s why Americans are doing such a poor job saving up money.
Lackluster savings aren’t only associated with low-income earners, though. Physicians, despite their high salaries, are also falling behind on their retirement savings. A Fidelity Investments report found that most physicians are on track to replace 56% of the income during retirement, when they should really be on track for 71%.
An AMA Insurance report revealed that just 6% of physicians consider themselves ahead of scheduled for retirement savings. Meanwhile, 53% of those between the ages of 43 and 59 and 46% of those aged 60 to 69 admitted to being behind where they would like to be.
Regardless of how close retirement age actually is, if you think you’re behind, then it’s time to kick-start your savings.
1. Make a plan
Retirement is a big goal and it can be a far way off, which makes saving for it and staying on track difficult. A plan is a necessity if you hope to retire on time or at all. The more specific the plan and the goal, the easier it is to follow.
Determining where you want to live will be especially helpful. Choosing to live in California will require a far different strategy than Oklahoma. Determine what your expenses will be and how you plan to use your Social Security and your savings during your retirement.
While planning for retirement, consider how you will withdraw money from the various accounts you have accumulated throughout your career. Each one will likely have a different tax rate and some will have a required minimum distribution (RMD).
If you do not take your RMD, then you face a penalty, which you likely didn’t plan for. (Read more about RMDs.) Withdrawing your money in a tax-efficient manner will ensure that the money you saved lasts for as long as you need it to. (Read more about decumulation strategies.)
2. Automate your savings
Out of sight, out of mind—automating your savings makes it easy to save without even thinking about it. Don’t be satisfied with the default option through your workplace 401(k). Set up a weekly, a biweekly, or a monthly number for your savings.
Forbes recommends aiming for double digit savings as a percentage of your salary. Doing so will better prepare you. Sacrificing a little now will pay off in the long run.
Furthermore, the earlier you start the saving process, the more compounding will work in your favor. After a few decades of consistently investing, you’ll accumulate wealth more quickly than you were expecting.
3. Increase contributions
This seems obvious, but some people assume that the 10% or 12% they are contributing is enough. For physicians, and other high-income earners, 15% or more is a better yearly contribution. After age 55, workers are eligible for catch-up contributions and can save an extra $1,000 in their IRAs.
Each year, consider increasing your saving rate by a percentage point until you reach the maximum contribution. In 2014, the maximum 401(k) and 403(b) contributions are $17,500, while an IRA or Roth IRA maxes out at $5,500.
4. Diversify your portfolio
Investing is a requirement in order to get retirement savings to the level they need to be, especially if you want to continue living a lifestyle close to the one you’ve become accustomed to. Leaving your money in a savings account will leave you vulnerable to inflation.
Once your retirement savings have begun to grow, put that money to use throughout investments. However, to decrease the likelihood that your nest egg will be wiped out from a market downturn, diversify, diversify, diversify.
The Entrust Group recommends allocating a portion of your portfolio to alternative investments, such as real estate, precious metals, and private equity.
“In a bad economy, nontraditional assets can be the ultimate wealth protector.”
Forbes suggests low-cost index fund or ETFs and reinvesting dividends and interest. Doing so will allow your retirement plan to grow faster with minimal taxes or fees eating away at what you earn.
5. Delegate your investments
You’ve done the hard bit of starting up your savings and putting away the money. Now let the professionals take over. The more you check your investments, the more you will be tempted to start trying to game the system, which rarely ever works.
People who frequently make moves in their investment portfolio will find their gains eaten away by fees. However, it’s also important to remember that a long-term game plan is usually the most likely to be successful.
Handing over your hard-earned money can be scary, but it doesn’t have to be if you do some research. After all, a fiduciary has an obligation to make decisions that are in the client’s best interest, just as a physician acts on behalf of the patient’s best interest.
Delegating investments can also be beneficial because the financial professional has less of an emotional stake. When emotions are brought into the mix, people find it hard to stay disciplined enough to stick with the plan when the market records significant decreases or increases. Working with a financial professional takes some of the risk of letting your emotions dictate your investments decisions.