Five Steps to a More Confident Retirement Plan

By Keith Blazek0 Comments

Americans are beginning to feel more confident about retirement since the great recession of a few years ago. In fact, according to a recent survey by the Employee Retirement Research Institute, almost 60 percent of American workers are confident that they are prepared for retirement, up from less than 50 percent when the survey was conducted a few years prior.

A recent article in U.S. News & World Report by Tom Sightings stated that, “confidence in retirement has increased due to the improving economy, more employment opportunities and the booming financial markets. But the single most important reason confidence has improved is because of employer-based retirement programs.”

Employer-sponsored plans, such as a 401(k), are the second most common way workers are saving for retirement. The most common is still Social Security.

Sightings adds, “while three quarters of full-time employees report they are saving at least something for retirement, most of them calculate that the total value of their household's savings and investments, excluding the value of their primary home and any defined benefit plan, is less than $25,000.”

Furthermore, according to the Social Security Administration, the average Social Security benefactor during the last 12 months received approximately $16,244, or about $1,354 per month.

Though improving, approximately 24 percent of American workers are still “not at all confident” in their preparation, which isn’t too surprising based upon the data that was just shared.

The most concerning insight though, is when Sightings shared the “average American spends almost as much time planning for a two-week vacation as they do planning for their retirement, which may last as long as 20 or 30 years.”

Considering that your retirement will (hopefully) last much longer than two weeks, an increased focus on retirement planning is critical for American workers, regardless of how confident they may currently feel in their preparations. So let’s discuss five things to consider as you revisit your retirement planning.

1. Take advantage of employer-sponsored plans – 401(k)s, 403(b)s, Pensions, etc.

If your employer offers one, use it. If you are one of the 20 percent of Americans surveyed who aren’t taking advantage of their employer’s plan, start.

It is understandable to worry about a reduction in your paycheck, but after a few months you won’t even notice it’s gone and you will soon adjust your spending to reflect the new paycheck balance. Plus, you can get a lot more mileage out of this 2-5 percent of your paycheck when it’s in the tax-deferred or tax-free environment of the plan, especially when invested and allowed to grow with compound interest. In a few years you will be pleasantly surprised by how much you were able to save for retirement with such a simple and small sacrifice.

If your employer offers an incentive such as matched contributions, max out the match as much as possible. That’s free retirement money you are letting go if you decide not to max out your employer’s match.

If you receive a bonus or a raise, resist the urge to spend it on an exciting vacation or a new gadget and instead contribute it towards your retirement and let it work for you. Your retirement is the longest vacation you’ll ever have, so it would be wise to use your bonus towards that instead of a 2-week cruise.

2. Save and invest in other areas as well – IRAs, Educational Savings Plans, Health Savings Plans, etc.

Don’t rely solely on your employer-sponsored retirement plans; there are other vehicles to save for retirement that are directly under your control. Individual Retirement Accounts (IRAs) go with you even if you leave your job, and you won’t have to worry about losing some of the account balance if you leave your employer before the account vests. IRAs also help protect you in the event your employer is forced to reduce your pension – an unfortunate scenario felt by many Americans in the last few decades.

As Sightings points out in his article, those who participate in employer-sponsored plans are more likely to also save in other retirement accounts because, as he says, “saving can become a virtuous cycle. When people start saving for retirement, they begin to take control of their lives. And once they feel that pull of empowerment, they realize they can in large part determine their own future for themselves.”

The idea of determining your own future and taking control of your life can become even more powerful when you decide to self-direct your retirement accounts. Self-directed IRAs are available from select Custodians, such as Equity Trust, and enable the investor to invest in much more than the traditional stock and bond markets while being in direct control of investment and account decisions. We’ll discuss why that is important in numbers 3 and 4 of this list.

Finally, consider additional savings plans such as the Coverdell Educational Savings Account (CESA) and the Health Savings Account (HSA). These are tax-advantaged savings accounts which enable investors to save for some of life’s major expenses, while offering the option of self-direction into alternative assets such as real estate, tax liens, and much more.  

3. Diversify your portfolio

The concept of portfolio diversification earned Harry Markowitz a Nobel Memorial Prize in Economic Sciences when he unveiled Modern Portfolio Theory. This theory focuses on asset allocation and strives to maximize the portfolio’s expected return while introducing non-correlated assets to reduce volatility and potentially reduce the risk of the portfolio as a whole.

In essence, by including assets that change value in opposite ways, (i.e. when the value of a certain stock goes up, a non-correlated asset such as a type of bond will go down) you can help mitigate the risk of the portfolio as a whole. In laymen’s terms, it means not putting all of your eggs in one basket.

Self-directed IRAs enable you to invest in alternative assets such as real estate, precious metals, tax liens, notes, and more – historically these assets have less correlation to the traditional markets.

Many investors turn to tangible assets, such as a rental property, in their self-directed IRAs in order to introduce more diversification into their retirement portfolios.  

4. Take inventory of your retirement income sources – or add some more

Retirees typically have multiple income sources (compared to their working years when their job was typically the sole source of income). Many retirees rely on a combination of Social Security, pensions, distributions from 401(k)s or IRAs, and/or their personal savings or investments for income in their retirement years.

As you plan for retirement, take inventory of all the income sources you intend to rely on and ensure there will be enough cash-flow to live the retirement you deserve. Remember, if you’re banking on Social Security to be a primary source of income, keep in mind the average benefactor receives just $1,354 per month and that number is likely to decline as the trust funds continue to deplete.

Alternative assets can often be used as income-producing assets while still holding value in the retirement account. Many investors have used their self-directed IRAs to invest in rental property, REITs, note investments, or apartment/commercial real estate in order to generate monthly cash-flow from the asset.

For example, let’s say your self-directed IRA owns a rental property worth $70,000 and receives $1,500 each month in rent. Your portfolio still holds the value of the tangible piece of property (leaving the potential to eventually sell it and recoup some of or profit from the $70,000 value), but also receives $1,500 of income each month to be used as you wish during retirement.

Understanding where your income is coming from, and how much it will be, is an important aspect of sound retirement planning. Having steady and reliable income from your income-producing investments during retirement is one way to help boost your retirement confidence.

5. Dedicate time to planning for retirement – and do so consistently

It is critical that we begin to devote more time towards our retirement planning than we do our vacations. Your retirement should be the best vacation you’ve ever had and in order for that to be possible you need to start planning, and revisiting the plan consistently, from now until it’s time to retire.

These five items should be a great starting point, but if you are interested in a free one-on-one consultation with one of our Senior Account Executives, click here to get started.