It starts with budgeting. To know how much financial leeway you’ll have in retirement, a thorough look at how much cash is coming in and going out is the first step. It sounds basic, but while some people are budgeting wizards, many more have only a fuzzy idea of how much they spend each month, especially as inflation wreaks havoc on prices.
After you’ve gone over credit card statements and online bank accounts and made a budget (advisers recommend budgeting apps such as Mint, Simplifi by Quicken and YNAB), consider doing a “cost audit” of your saving and investment accounts.
“Managing fees is crucial, and conducting a cost audit is a good way to feel a sense of control in an environment that feels out of control,” said Christine Benz, director of personal finance at Morningstar.
Once you know what your monthly budget is, you can see whether you have enough saved to cover at least three to six months of emergency expenses, as many financial planners recommend.
Finally, advisers say it’s a good idea to look across all of your different investment accounts to make sure you’re clear on your stock exposure. Some retirement savers might be surprised to see how heavily the target-date fund in their 401(k) is invested in equities. The asset allocation in these funds starts out with a high percentage in stocks and becomes more conservative as you get closer to your target retirement date. A big equity stake isn’t necessarily a bad thing as long as you don’t need to cash out into a down market—which can happen if you switch jobs or if your company has layoffs—but it’s good to be aware of how risky your investments are.
Younger Workers
Ideal savings: By age 30, a saver should have at least one year’s worth of salary saved, according to Fidelity; at 40, the goal is to have three times their salary socked away.
Those in their 40s and below have a secret weapon to catch up for retirement: time. As interest and capital gains compound over the years—particularly in tax-advantaged retirement savings accounts like 401(k)s and IRAs—early savers have the power to grow their investments exponentially. After-tax money put into a Roth account is also a very powerful way to build wealth, since investments can compound over many years and, unlike with 401(k)s and IRAs, you won’t need to pay income tax on the money you withdraw decades down the line.
But the current market fluctuations also provide another useful tool for savers. Basically, it’s an opportunity to buy valuable stocks at a discount.
“These are the markets where you make money as an accumulator, and you want to buy stuff at a discount and sell at a higher price down the line,” said Morningstar’s Benz. She suggests automating investing both inside and outside of 401(k)s. “It’s that invisible hand that reaches into your account and takes money out each month, so you don’t have to think about it.”
This article was provided by Bloomberg News.