It’s no secret that it’s hard to plan for retirement. In addition to growing a sizeable nest egg, you must protect it from external factors like market volatility, inflation, and unforeseen expenses. And, to be brutally honest, that’s been tough as of late.
Northwestern Mutual’s 2022 Planning & Progress Study shows that personal savings are down 15% from $73,100 in 2021 to $62,086 in 2022. Moreover, 60% of American adults say the pandemic is “highly disruptive” to their finances.
In the midst of the pandemic, though, Americans saved around $2.5 trillion. Unfortunately, those cash reserves are drying up as people use them to deal with 40-year-high inflation. According to a Forbes Advisor survey, two-thirds of Americans are raiding their savings because goods and services are so darn expensive.
That said, planning to retire comfortably means securing your savings and assets. While that can be overwhelming initially, here are the 10 easiest ways to protect your retirement money.
1. Develop a financial forecast for retirement.
Calculating how much cash you’ll need for each year of retirement can help you save a bigger-than-expected nest egg. “Nowadays, if you retire at 65, you should have a financial plan for 20 years,” Tenpao Lee, a professor of economics at Niagara University in New York, told U.S. News.
Because your funds will need to last through these decades, you may want to consider 401(k) and IRA withdrawals as your new paycheck. Those amounts, plus your Social Security benefits, can cover your daily expenses.
Developing a retirement budget can prevent you from overspending, incurring debt, or exhausting your savings.
2. Make use of your retirement savings to bridge the Social Security gap.
“Use your retirement savings to fund a Social Security bridge strategy, advises Steve Vernon, president of Rest-of-Life Communications. “Doing so can significantly increase the amount of Social Security income you’ll receive over your lifetime by enabling you to delay the start of your benefits as long as you can.” However, delaying further than 70 doesn’t offer any benefits.
You can also bolster your retirement income with a Social Security bridge plan. How? Vernon explains that you can convert easily accessible savings –a target for fraudsters- into a guaranteed income stream from the government.
3. Diversify your retirement portfolio.
As the adage goes, don’t put all your eggs in one basket. Make sure you’re spreading your investments out between stocks and bonds. You should also take your risk tolerance into account when choosing your investments.
More specifically, your retirement portfolio should contain high-yielding bonds and dividend-paying stocks.
It is generally recommended that your investments should become less risky the closer you get to retirement. You can spread out the risk by investing in different things, which will give you a more stable allocation of your assets.
Also, look for other ways to make money besides bonds and stocks. Many people seek additional income streams and new opportunities even in retirement. Examples include freelancing, working from home, and passive income sources like rental properties.
4. Choose your asset mix carefully.
“It’s essential to think about your asset mix, which simply means the different types of investments that go into your portfolio,” recommends Jordan Bishop in a previous Due article. “For example, investing in stocks may help you grow your retirement fund faster, but if they drop substantially, you could also see plenty of losses.”
That’s why you’ve got to choose your assets carefully. Also, ensure that your portfolio includes a combination of investments.
How can you choose the right assets?
First, invest in stocks when you’re young.
“When deciding how to allocate your funds, a general rule of thumb is that the younger you are, the more you can invest in stocks,” adds Jordan. Since stocks offer much higher returns than other assets, they have always tended to rise in value. But, if there are any losses, you have time to recoup.
Secondly, choose safer investments as you get older.
“Investing in low-cost index funds will provide you with an average return without taking on too much risk,” Jordan states. “But if you really want to reduce risk as much as possible, investing in bonds or bond funds rather than stocks or stock funds is the way to go.”
5. Keep some cash on hand.
Almost all financial planners say you should hold on to at least some stocks in order to avoid outliving your assets. However, retirees need to be more careful with their investments. Unlike younger investors, they don’t have long time horizons.
Professionals say you should keep five years’ worth of expenses in cash as a safeguard. Lucky, those with that kind of cash have had enough extra to work toward a goal like that. Alternatively, you may use cash equivalents, such as short-term bonds, certificates of deposit, and Treasury bills.
You should be able to keep most of your expenses stable once you retire. But that doesn’t mean you’re free from the unexpected.
For example, how would you cover a home repair or medical emergency? Working overtime is no longer an option. So, will you use a credit card or tap into your savings? Moreover, if market conditions temporarily cause your investments to fall, you should not withdraw money from them.
If you’re worried that inflation will grow and erode your purchasing power, consider holding some “cash equivalents.” These typically take the form of Treasury Inflation-Protected Securities.
TIPs have a fixed interest rate, but their par value increases with changes in the Consumer Price Index. In other words, if inflation hits 5%, your investment will grow too. With a TIPS, the inflation adjustment component keeps the principal’s purchasing power intact. However, you’ll lose inflation adjustment money if we enter a period of deflation after buying TIPS.
6. Prepare yourself for inflation.
Speaking of inflation, the cost of living rose by the most in 4 decades in 2022. And, suffice to say, a lot of us are struggling.
“Nearly half of Americans (45%) polled by Gallup last year admitted inflation caused financial hardship at a time when the CPI was just 6.8%,” writes Pierre Raymond in a Due article. “Moreover, of those that reported facing difficulties, 10% revealed their challenges impacted their standard of living.”
“While the Federal Reserve claims inflation’s bubble will pop soon, experts anticipate the CPI won’t fall below 4% by the year’s end,” he adds. “That means you can expect another year of high inflation bumping up prices.”
Updating your budget with inflation in mind.
There is, however, a silver lining. You can use the following techniques to stop inflation from deflating your savings.
- Make a list of priorities. This shows the bare minimum you need every month to cover your essentials. It’s a good reminder of what you need to pay first.
- Cut discretionary expenses. Whatever items didn’t make it on your list of priorities should be placed on the chopping block.
- Automate savings. Ideally, you want to have 3 to 6 months of expenses in your emergency fund.
- Tweak your phone and internet package. Consider downsizing your unlimited plan to a plan with strict data and talk limits.
- Update your insurance. Compare plans or negotiate a better rate with your current provider.
- Eat better for less. Plan your meals based on weekly flyers and coupons.
- Use less energy. You can reduce energy consumption by keeping your AC at 78°F when you’re at home. During the winter, keep the heat at 68°F while you’re at home.
- Reduce your fueling costs. Consider downloading an app like GasBuddy or carpooling.
- Learn how to negotiate. Contact your credit card company to negotiate a more favorable interest rate.
- Investigate financial assistance. Contact a free credit counseling organization for financial advice.
7. Don’t overlook healthcare and long-term expenses.
According to a Fidelity Retiree Health Care Cost Estimate in 2022, a retired couple would need around $315,000 saved (after tax) to cover health care expenses in retirement. However, with people more likely to live longer, they will need to pay even more down the road. So, keep that in mind when constructing your retirement plan.
And, to make matters worse, this figure does not include long-term care (LTC) costs. You might want to set aside a separate fund for long-term care costs to secure your retirement income. Additionally, you should consider long-term care insurance. This could help protect seniors over 65 who may suffer from disabilities, chronic conditions, need nursing care, and home health care.
Also, if you have an annuity, ensure you attach a long-term care rider to cover these expenses. There are also stand-alone LTC annuities if you’re interested.
8. Have a plan for taxes.
Individuals don’t always understand how taxes can impact their retirement savings and assets. Capital gains, inheritances, and estate taxes can heavily reduce your retirement fund. In turn, this reduces your savings.
That’s why, when planning for retirement, consider all the taxes that your savings, assets, and income may be subject to today and tomorrow. Consulting a financial advisor for direction is also strongly recommended.
9. Rethink target-date funds.
Target date funds provide an investment mix of stocks, bonds, and cash based on the age you plan to retire. As you approach retirement, the fund will automatically adjust its mix to become more conservative.
However, some people use them wrong, says Mike Gray, a CAPTRUST financial advisor.
Suppose they plan to retire in 2045. Instead of purchasing a fund for the year, they put a little bit of money into a fund for the year 2030. Why? They think that’ll be safer. Following that, they put some money in a 2060 target-date fund, which is more aggressive.
“The combination of those choices may not be as effective as choosing the single right target-date fund. So you need to put it in one fund based on your planned retirement age and stick with it,” he says.
But, that’s not the only problem with target-date funds.
- One-size will never fit all. The one-size-fits-all approach, relying simply on a date, can cause inappropriate asset allocation.
- The funds invest in themselves. Most target-date funds invest mainly in other funds managed by the same company. Ignoring the conflict of interest, for now, limiting investment options can hurt returns.
- Fees. Because they invest in other funds, target-date funds charge multiple fees.
- Most investors can do better. But, unfortunately, despite target-date funds’ good premise – growing wealth during the first years of a career and protecting it later – for many investors, they won’t deliver on their promise.
10. Avoid excessive withdrawals.
Your retirement income can be at risk if you spend your funds too fast. As such, it is prudent to withdraw your funds slowly toward the end of your working life. Furthermore, it’s essential to know that 401(k)s, traditional IRAs, and even Roth IRAs have different rules, taxes, and withdrawal rates.
These rates and taxes can severely eat away at your retirement savings if you don’t take measures to minimize them. Because of that, it’s a good idea to be mindful of them and plan withdrawals accordingly.
In short, you may derail your retirement planning if you withdraw too much from your retirement account.
11. Buy an annuity.
When facing an income-expense gap, consider an annuity. Annuities provide lifelong guaranteed income. You can therefore manage your money throughout retirement more effectively.
When you buy an annuity, you sign a contract with an insurance company. This company assumes the risk of a series of payments over the years in return for a lump-sum investment. However, some annuities can be purchased over a series of payments.
Although you can specify an exact timeframe — like for 20 years — you’ll receive monthly payments for the rest of your life. With a fixed annuity, you’ll also know what you’ll be getting. For instance, with Due, you get 3% on your money — no matter what.
At the same time, it’s often suggested that you wait on an annuity until you’ve maxed out your other retirement accounts.
Frequently Asked Questions
How much money do I need to retire?
There are several factors that determine the amount you need. It depends on your age at retirement, how long you live, and how much money you get from pensions or Social Security. If your spending needs are more than your retirement income, you’ll have to take withdrawals from your retirement fund to fill the gap.
The most important factors are how much you’re withdrawing, for how long, and any earnings or losses on your savings.
How much can I contribute to a retirement account?
Contribution limits for retirement accounts are often increased annually. For example, a person’s contribution limit to a qualified individual retirement account (IRA) in 2022 will be $6,000 ($7,000 if you are 50 or older). Individuals can contribute up to $20,500 to a traditional 401(k) in 2022. People over 50 can make a catch-up contribution of $6,500 per year — making their total $27,000.
There are no contributions with annuities.
What happens if I take money out of my retirement account early?
When it comes to retirement accounts, you can’t withdraw money until you’re age 59 ½. The early withdrawal penalty is 10%, plus any taxes due.
Are there taxes on retirement account withdrawals?
In most cases, yes.
Taxes are deferred on IRAs and 401(k)s. This means you put money into the account before taxes and could deduct it in the year you funded it. Therefore, you’ll be taxed on withdrawals in retirement at your current tax rate. On the other hand, Roth IRAs are tax-free because they’re funded with after-tax money.
What is the best way to invest my retirement savings?
It’s crucial to avoid significant losses in your early retirement years (and years leading up to it). If you withdraw money with a low balance, you’ll run out of money sooner than expected. But that doesn’t mean you shouldn’t risk it at all.
Your retirement will hopefully last a long time. However, prices will rise over time, and your account balances may need to grow to keep up with inflation and fund a lifetime of income. Unfortunately, you might not produce enough if you put your money into low-yielding safe investments.
It’s hard to find that balance. And it’s easy to get fooled by too-good-to-be-true investments. But on the other hand, many people can fund a comfortable retirement with a diversified mix of low-cost mutual funds or exchange-traded funds.
Ultimately, you must figure out how to spread your money among these investments. And depends on your risk tolerance and financial situation.