The new year will move us one year closer to retirement. But few Americans are more prepared than last year. We may be tracking the stock market more closely than ever, but we still need better saving and investment strategies to get ready to retire. Here are 10 New Year's resolutions for retirement.
Set manageable savings goals. Amassing $1 million or more for retirement—or any other number you have calculated—is certainly a worthy goal. But accumulating a large chunk of cash takes time and diligence, with few milestones along the way. Setting intermediate savings goals, such as contributing enough to get your annual 401(k) match from your employer or saving 10 percent of your pay, can make saving easier. Punam Anand Keller, a management professor at Dartmouth College's Tuck School of Business, says making a list of what you will use your retirement stash for makes saving less of a sacrifice. "I am saving now so that when I have time when I am older and retired, I am going to go on exotic international trips with my friends," she says. "You can actually see it going towards something concrete rather than just aiming for $1 million."
Maximize retirement savings tax breaks. Utilize tax-deferred retirement accounts as much as possible in the years leading up to retirement. Workers ages 50 and older can contribute up to $22,000 to a 401(k) in 2010. Only 10 percent of retirement plan participants saved the maximum amount in 2008, according to an analysis of 3 million Vanguard account holders. At a minimum, contribute enough to get your employer's full 401(k) match. Those over age 50 with an adjusted gross income of $66,000 or less ($109,000 for couples) can save another $6,000, tax-deferred, in an IRA. If neither you nor your spouse has a retirement plan at work, the IRA income limits don't apply.
Save your sick days for retirement. Some companies give workers cash payouts for unused sick and vacation days, typically when they leave a job—but sometimes while still employed. Employees can now deposit that cash windfall directly into their retirement account, according to a new IRS ruling. Ask your human resources department if your leftover annual leave can be tucked away in your 401(k), especially if you can't roll over unused time to next year.
Make a long-term investment plan. Stop adjusting your investments every time the stock market appears to hit a peak or trough. "The biggest mistake people make is bailing out when the market is doing badly and then buying back in when things pick up," says William Droms, a Georgetown University finance professor. "It's best not to make a precipitous change in your portfolio because of the crash of 2008." Traditionally, workers have gradually reduced their stock exposure as their desired retirement date approaches. "If you're really nervous about the market and you want to transition your portfolio to be more conservative, don't do it all at once," Droms advises. "Do it over a two-year period until you get where you want to go." Keep in mind that you also need to beat inflation and prevent outliving your money.
Minimize investment fees and penalties. Familiarize yourself with 401(k) and IRA rules to avoid penalties. Withdrawals from retirement accounts before age 59½ (and 401[k]'s at a former employer before age 55) typically come with an early withdrawal penalty of 10 percent plus income tax on the amount withdrawn. After age 70½, annual distributions from retirement accounts are required. Seniors who fail to take the withdrawal face a tax penalty of 50 percent of the amount that should have been withdrawn plus income tax. Also, pay close attention to investment, administrative, and transaction fees, which can cut into your returns over time. Note the expense ratio when choosing among funds in the same asset class. Consider lower-cost investments such as index funds.
Boost your Social Security checks. Workers often sign up for Social Security benefits as soon as possible at age 62. But payments increase by 7 to 8 percent for each year a worker delays his or her start date between ages 62 and 70. "It's a much bigger payout if you can afford to wait," says Droms. Monthly checks are calculated using the 35 years you earned the most. Thus, every top-earning year in your 60s cancels out a year earlier in your career when you earned less.
Coordinate retirement with your spouse. Married workers can strategize about when to sign up for Social Security to maximize their total benefits. Spouses are entitled to Social Security benefits based on either their own earnings or checks equal to 50 percent of the higher earner's benefit. When one spouse passes away, the survivor's benefit for the other is the full amount of Social Security the higher earner received. "If you and your spouse are approaching retirement age, put together a plan for how to claim Social Security benefits," says Andrew Biggs, a resident scholar at the American Enterprise Institute and a former deputy commissioner of the Social Security Administration. "Claiming at different ages can increase total lifetime Social Security benefits as well as generating greater protection for a surviving spouse later in life."
Downsize your lifestyle. There's a reason retirees are known for hitting up early-bird specials and inquiring about senior discounts. Most don't have a lot of disposable income to burn. Downsizing into a smaller house or condo after the children move out or selling a second car previously used for a spouse with a separate commute can give a major boost to your nest egg. After you exit the workforce, consider relocating to a locale in the United States or even abroad where the cost of living and taxes are lower. A growing number of retirees are also sharing a roof with their adult children to cut costs for both generations. Generally, the grandparents provide some child care for grandchildren, and the rest of the family pitches in with elder care as needed.
Delay your retirement date. For workers without traditional pensions, a life of full-time leisure may be a thing of the past. Just over a quarter of Americans between ages 65 and 75 continued to work in 2008, according to the Census Bureau. Workers on the cusp of retirement with meager savings will have little choice but to continue working. Delaying retirement packs the double punch of giving you more time to tuck money away and reducing the number of years that your savings must last. "Putting off retirement a year or two can do really wonderful things for your retirement situation," says Droms. "Leave your money a bit longer, and give it a chance to recover without depleting your assets at a bad time to deplete them." But that doesn't mean you need to stick with a full-time job you dislike. About 40 percent of older workers cut back on their hours or transitioned into part-time work. Look into consulting, blogging, teaching, and other opportunities to bring in some extra income from your accumulated experiences.
Develop a nonfinancial plan. After you leave the workforce, the hours that used to be dominated by work can be spent however you wish. Come up with a plan to pursue a hobby, volunteer, or spend time with your grandchildren. "If you say, 'I'm going to retire in five years so I can start my own business, so I can spend more time with my family, so I can do something I love,' I think you are more likely to reach that goal," says Keller. But recognize the difference between goals and daydreams. Says Keller: "If retirement is a goal but you are not saving for it, then retirement is just a fantasy."