No one expects you to know everything under the sun about saving for retirement-that's why our profession exists!
We want to shed light on the overlooked savings opportunities that may help put you in a better financial position.
As we've met with clients over the years, these are three of the most common things that people don't know about saving for retirement.
The Tax Code Offers You Benefits As You Get Older
While it's better to start saving and investing from a young age, we understand that it's not always feasible to save and invest as much as you'd like to when you're just starting out. Between saving for the down payment on a home, the expenses of raising children and money that may be needed to pay off education and auto loans, there's not always a lot of excess money that can be put away for retirement.
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Fortunately, once you reach a certain age, you're able to significantly increase the amount you're allowed to put away in tax-advantaged savings vehicles. Once you turn 50, you can contribute an extra $1,000 ($6,500 total) in an IRA and an extra $6,000 ($24,000) in an employer-sponsored plan. For those who have access to a health savings account, you can contribute an extra $1,000 ($4,400 total for a single plan; $7,750 for a family plan) once you reach age 55.
You'll Be Forced to Dip into Your Savings
Many of our clients come to us with a significant portion of their savings in a tax-deferred retirement account. While we applaud them for being prudent investors by putting their money in a vehicle that allows them to receive an immediate tax deduction and years of tax-deferred growth, that doesn't mean that's the only place where you should place your money.
The reason is that once you turn 70.5, you'll be subject to required minimum distributions. The amount you're forced to withdraw is based on your age and the amount of assets that are subject to RMD rules. This means that if you have an overwhelming portion of your savings in a tax-deferred account, you may face a large RMD which could cause a big spike in your taxable income. So while the tax-deferred option feels great today, consider biting the tax bullet and have a portion of your portfolio invested with after-tax dollars (Roth IRA) or in an immediately taxable account (brokerage account).
There Are No "Straight Lines" When Investing
When you hear people talk about financial planning-including the two of us-they'll talk about it in terms of what we'll call "straight lines." "If you earn 6 percent per year, and we assume a 3 percent rate of inflation, you'll have X dollars in retirement." All of this sounds great until you look at how markets have performed or the historic rate of inflation and you realize that these economic and financial factors don't move in straight lines.
In reality, markets zigzag up and down. You might have years where you gain 20 percent and you might have years where your portfolio declines by 15 percent. Over a 30-year period, while you might average 6 percent, you may not have a single year where you actually earn 6 percent.
Remembering that investing doesn't occur in a straight line is important for two reasons.
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First, it means that you shouldn't be too elated when the markets are up and too despondent when the markets are down. It's the nature of investing, and those ups and downs are unavoidable if you want to earn a reasonable rate of return on your money.
What's more important is that the general long-term trend of markets is that of an upward
trajectory.
Second, it illustrates that markets are unpredictable in the short-term. We don't know what the stock market will return this year. We can make an educated guess, but at the end of the day, it's still a guess. What financial advisors can do is help you invest so that, over longer periods of time, you're hopefully able to achieve meaningful gains in your portfolio.
We understand how difficult it can be to consistently invest during your working years.
Hopefully, the three items we outlined will make saving for retirement easier to accomplish.
