Difficulty in retirement planning arises mainly due to the many assumptions you have to make about the future. If you invest aggressively, a stock market plunge could leave you with too little cash to retire when you want to. Be overly conservative, and you could miss out on market gains and the nicer retirement lifestyle they might help you achieve. Balance that just right, and inflation could still throw every calculation out the window.
Not many choices you make with your nest egg will guarantee good results. But the good news is that some steps are guaranteed to shorten your time to financial freedom. Here are a few such moves:
Make sure to find the lowest cost version of your investments. Some people are invested in funds that have a much cheaper alternative. I used to have an option in my 401(k) to invest in a S&P 500 index fund that cost 0.5 percent a year, when I could have done the same thing for 0.05 percent a year. You would think everyone would choose the lower cost fund, but the costly fund had quite a bit of assets.
And don't stop at the expense ratios either. Some funds turn over their holdings more, which means they will incur more capital gains taxes for you to pay. Scrutinize every holding, and make sure to keep as much as possible for yourself.
Invest the excess cash in accounts earning nothing. You don't want to overdraft your accounts, so you end up leaving a chunk of cash at each institution just in case. Yet, the more money you have earning nothing, the longer you have to work. One way to reduce the drag is to simplify your accounts. The fewer accounts you manage, the less excess cash you'll have.
Be sure to take a closer look at cash aimed to pay for emergencies as well. The general rule is to maintain 6 to 12 months of expenses in cash. But the more investable assets you have, the less you need to keep in cash. That's because you have much more financial resources to deal with sudden cash needs.
I try not to keep too much money in even high yield online savings accounts, because I can use my credit cards to deal with immediate needs that can then be paid when the statement is due by dividend and interest payments on my investments. If my needs exceed what I get in investment income, I can always sell my fixed income first, and then my stocks. This works because the need to sell investments is such an infrequent event it’s worth the risk in my situation. In the meantime, my investments will be earning more than the next-to-nothing interest that cash is yielding. This strategy will only work for disciplined folks with a sizable investment pot, but those who can take advantage will reap good rewards.
Track expenses, and get rid of wasteful spending. No matter how bad the market does and how awful the available investment choices are, you will shorten your path to retirement if you simply save more. Figure out where you are spending money, and get rid of everything that isn't truly making your life better. I keep coming back to my example of cable TV, because I'm saving so much by not having it. For those who absolutely cannot give it up, grab the new customer promotion codes and sign up with a new carrier. Don't just accept the high costs. Do something to knock the price down.
Lower your borrowing rates. Stop paying high credit card fees. Start by looking for cards that give you a lower interest rate. Then, try to refinance your mortgage whenever there's a better rate. Just make sure you understand how much you are paying upfront, and that you aren't lowering your payment by extending the repayment schedule.
And speaking of housing, try to stay in the same home for as long as possible. You won't miss paying the realtor 6 percent for selling your home, and you will save on property taxes and upkeep because moving is always a very costly endeavor.
Invest more in tax-advantaged accounts. I wish I had maxed out my tax-advantaged accounts every year I had a job. Whether it's a Roth IRA, 401(k) contributions or even starting a 529 account, I left money on the table by not maxing out the yearly limits and taking advantage of the tax-free growth. Hate paying taxes? Then do something to lower your tax burden. Even small tax savings can add up to huge numbers after enough time passes.
Move assets around to different accounts based on how they're taxed. As if investing isn't complicated enough, the income thrown off by MLPs, REITs, commodities, stocks and bonds are all taxed at different rates. This is another reason why having money in tax-advantaged accounts is so valuable: You can shift the more highly taxed investments into the tax-advantaged accounts, and keep the lower taxed investments in taxable accounts. Play around with having different accounts hold different investments to see how you can pay fewer tax dollars to Uncle Sam every year.
The path to financial freedom is unpredictable enough. Start the year off in the right direction by doing things that will guarantee a smoother path to retirement.
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