Retirement planning today is not what it used to be.
Decades ago, retirees could simply shift their investments into fixed income, which historically paid higher rates of interest. Today, those same investments likely pay very little. Complicating matters further, we're all living much longer, so we need to be careful we don't outlive our money.
Needless to say, comprehensive retirement planning and careful investment management are more important than ever. Here are some easy things you can do on your own to help tip the scales in your favor.
1. Reduce your investment expenses and fees. Just like inflation can eat into your buying power, any costs related to your investments reduce your return. The easiest way to increase what you earn is to simply reduce your costs.
Especially if you're invested in mutual funds and exchange-traded funds, you've probably got hidden fees. Typical costs include the expense ratio for each mutual fund or exchange-traded funds you own. That's a fee you pay to the manager of that fund. This fee doesn't appear on your mutual fund statements, so you have to look for it. This fee is in addition to what you pay your financial advisor if you didn't buy the funds direct.
There can be other fees, too, such as transaction fees and loads. Always take these fees into consideration when choosing mutual funds and ETFs. With so many products out there, it's likely there is a lower-cost, similar option.
If you use a financial advisor, be sure to always ask if he or she is using the lowest-cost options for each investment in your portfolio. This is critically important, as even a small percentage compounded over time can make a significant difference in the future. And it's unfortunately far too common for investors to be put into more expensive investments because they pay the broker a bigger commission.
The end result? Even a modest decrease in investment expenses can result in additional yield for you, which keeps your money working harder for you without taking on any additional risk.
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2. Use the most tax-efficient manner. As the old adage goes, it's not what you make, it's what you keep that matters. A second way to reduce costs, also without increasing your risk, is to reduce the amount of taxes you have to pay. One way to do this is to make sure you are holding investments with the highest potential tax liability in your tax-deferred accounts (such as a 401(k) plan or a traditional IRA).
Conversely, you would then keep investments with low tax loads in your taxable accounts. For example, investments that may generate ordinary income or short-term capital gains may be best held in your tax-deferred accounts. This might include taxable bond investments, where your interest payments are taxed at higher ordinary income rates. Then, you would keep more tax-efficient investments such as tax-free municipal bonds in your taxable accounts. These small adjustments can help increase the portion of your returns you keep, all with no extra risk.
3. Don't miss out on catch-up contributions. Investing in tax-deferred vehicles is one of the few ways we can turbocharge our investing without extra risk. But our annual contributions are limited. Fortunately, once you are age 50 or beyond, you're allowed to make additional contributions, which means you can put more into your IRAs, 401(k) plans and other retirement accounts.
There's also health savings account catch-up contribution allowed once you are 55 or older. All these options allow you to put away more, so you can have more money available to you in retirement. This is a valuable and often underutilized way to boost your retirement savings.
4. Increase your Social Security benefit by waiting. While the future of Social Security may not be certain, for now it's still a valid income source. The amount of your Social Security check won't likely be big, but there's a way you can increase it quite a bit just by delaying it a few years. For every year you delay claiming Social Security past your full retirement age, which is typically 66 or 67, you can get an 8 percent per year increase until you are 70.
If you're in good health, this is an easy way to bump up your retirement income without additional risk.
Smart retirement planning
In conclusion, there's nothing easy about retirement planning today. A lot of work goes into building a portfolio that can take you and your loved ones to the finish line.
If you decide to do it yourself, be careful not to take more or less risk than necessary. If you decide to use a professional to help you, you can definitely relax a bit, but not too much.
Remember, it's your money and you need to always watch it closely. Don't put things on auto-pilot. Instead, stay involved, ask questions and always monitor all your financial statements. Your future is too important not to.
(Editor's Note: This column originally appeared on Investopedia.com.)
— By John Odell, principal at Arroyo Investment Group