Keep the bottom line top of mind.Â A funny thing about investing: The more you save and the bigger your balance, the more fees you have to pay in dollar terms. So now that your account has some serious money, shifting to lower-cost options such as an index fund is an easy way to save big (see chart). If you have $100,000 saved by 40 and underlying returns average 7%, the savings by 65 of switching from a 1.2%-fee fund to 0.3% is $102,000â€”nearly a whole second nest egg.
Shoot for 17%.Â How much you need to save depends on how much you already have. But 17% is a good mental anchor. Thatâ€™s the number Wade Pfau of the American College of Financial Services came up with for folks starting from scratch at 35, with a 60% stock/40% bond portfolio, to safely fund a typical retirement goal. You might be okay saving less if the markets go your way, but Pfauâ€™s number is what it takes to get there even with poor returns. Thatâ€™s far more than the average 401(k) contribution of around 6% to 7%. But take a deep breath. That number includes the contributions from your employer.
Resist the urge to borrow.Â About 22% of participants between 35 and 54 in plans run by ÂVanguard have borrowed from their retirement accounts. Compared with other forms of debt, a 401(k) loan isnâ€™t the worst. But the amount that you borrow is money thatâ€™s not compounding tax-deferred.
Save in bursts.Â Neither saving nor spending runs along a smooth path. For example, you may have to pare back savings while paying the kidsâ€™ college bills. The good news is that â€śafter 50 is when people should be able to save the most, as their kids are moving out, theyâ€™ve paid off the mortgage, and they should be in the highest earnings years of their lives,â€ť says economist Wade Pfau. Starting at 50, you can also make extra 401(k) contributions of up to $5,500, on top of the normal $17,500.
Prep for the spend-down phase.Â Once you retire, youâ€™ll have to spend out of your nest egg regardless of market conditions. Even if stocks do well on average, a bad run early on can deplete your portfolio. So â€śstart taking a couple percent of equities off the table every year in the five or 10 years leading up to retirement,â€ť says financial adviser Michael Kitces.
Readjust your target.Â According to polls, Americans expect to retire around 66. But the actual age of retirement is 62. Things happen: You may run into health issues or be forced into early retirement. Now many 401(k) savers use target-date funds. As you gain more visibility on your own retirement date, adjust the Âtarget-date fund you use. As the chart shows, it can make a big difference. Notes: Cash-out growth assumes a 5% annual return. Fee calculations are based on total costs, including forgone gains. sources: Morningstar, T. Rowe Price, SEC, MONEY research
Brought to you by Money.com 29 June 2014