Much of the financial services industry focuses on convincing individuals that access to the "right" investment ensures progress toward retirement goals. Unfortunately, this approach often neglects the most important aspect of retirement planning: saving.
Ideally, you should aim to save 15 percent or more of your income—including the company match—for retirement. The industry focuses more attention on investing rather than saving because it is easier to convince someone that a single investment holds the key to their retirement dreams than it is to convince someone to save a substantial portion of their income.
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After all, we "need" that money for a new car or boat. Not to mention the instant gratification we get from a purchase feels so good.
Instead, the industry shies away from educating investors on establishing goals and making tough budgeting decisions, and focuses on selling a service or product. This makes it easier on both sides—the industry feels good for "helping" the individual and the individual feels good because they are "planning for retirement." All the while, neither side does what it should be doing.
We can change that focus by reprioritizing and doing a little work upfront. When looking at your retirement plan, don't skim over the contribution section, randomly choosing a number by chance. Make this first step as important as choosing funds. Here are some more tips to think about when crafting your retirement plan:
Decide what type of lifestyle you'd like to live in retirement. Generally, it's suggested in order to maintain your current standard of living you need to be able to replace 70-80 percent of your pre-retirement income for 20-25 years. If you plan to travel, you may want to be able to replace more than 80 percent. If you think you'll spend less, you may need to replace less than 70 percent.
See if you're on track to reach your new goal. Evaluate your new goal based on your current savings, estimated future savings, and an investment return of 6 to 8 percent annually. If it looks like you'll be able to reach or exceed your goal with your current savings, congratulations!
If you aren't on track, consider thinking about a different retirement lifestyle or increasing your savings.
Find out what type of investor you are. Are you a conservative, moderate, or aggressive investor? And what type of investments does that mean you should buy? Generally, conservative investors tend to have more cash and bonds than an aggressive investor. Keep in mind that if you're a more conservative investor, you'll likely want to increase your savings rate.
If you decide to hire someone to help you with the investment step, find out how much the adviser charges during the first twelve months. For investors with less than $500,000, it will likely be between 1 and 1.5 percent of assets annually. As you are conducting the interview process, a good test is to ask about fees upfront. If the adviser openly discusses their fees and the services they provide it's a good sign. If they are hesitant to talk about fees, it's a red flag.
Start investing based on your new plan. Only after you've discovered what lifestyle you'd like to live in retirement, how much you need to save, and whether you're on track to reach your goals should you start focusing on investments.
Review your situation annually. You should take into account your goals and your investment plan to see if you need to make any adjustments. Market downturns are inevitable, and your life will change as you plan for retirement over the next 10, 20, or 30 years, so don't be surprised if you need to make adjustments along the way.
While savings rates aren't the most popular topic, focusing on your contribution amounts may be the best way to reach retirement goals. Maybe that means admitting we've concentrated on "investment success" for too long. Instead, start focusing on retirement planning success. Perhaps then we will be motivated to work towards a goal instead of being paralyzed by fluctuations in the market.
Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost effective 401(k) advice and solutions for the every-day investor. His advice has been featured on various news outlets including FOX Business, USA Today and The Wall Street Journal. Keep tabs on Scott on Twitter andFacebook.