- Take a Fresh Look at Your Retirement Plan
There are usually numerous investment options for retirement accounts, so you want to make sure that you're taking advantage of the right ones for your current situation. Ideally, you should have a mix of investments (called an "asset allocation") that not only matches your attitude toward risk, but also the amount of time you have to let them grow before reaching your goal. For example, if you're older and closer to retirement age, you should most likely have your money in lower-risk, lower-return investments, such as bonds or even cash. Your money may grow more slowly, but there's also less risk of it taking a significant dive in value close to the time when you will need the money most.
In order to find your own correct investment mix, you could hit the books and do some research yourself, but remember that this is complicated stuff, which is why Sanborn advises working with an investment professional to craft the right plan for your life stage.
And once you have an investment strategy in place, it’s crucial to stay loyal to it. "Don’t let emotions get the best of you," Sanborn says. "If you stick to a good, long-term plan that includes periodic rebalancing, you’ll end up buying low and selling high, which is the whole point of investing.”
- Don't Put Off for Tomorrow What You Should Do Today
Sanborn often runs into situations in which older clients haven’t even started contributing to retirement accounts—whether it's because they have to make high monthly minimum payments toward loans or they're simply spending too much on a daily basis. Bottom line: The younger you are when you start contributing to a retirement account, the more extra cash you’ll have when you’re older.
Need more proof? Let's say that Ryan and Katie both invested $24,000 in their retirement funds over the years, but Ryan began putting in money ($50 per month) at age 25, while Katie started contributing ($100 per month) at 45. Even though they both put in the same total amount, and assuming that the market gives them returns of 7% a year, Ryan will have more than twice as much money saved for retirement as Katie when they each turn 67.
So if you aren’t saving for retirement, the time to start is now.
- Ramp Up Your Savings—Even if It's Only a Little at a Time
Sanborn recommends that clients increase their retirement savings every six months by 1%. “It allows you to more easily adjust to the changes in your budget and your paychecks,” she says.
Take this example: Let's assume that you make $50,000 a year. At the end of the first year of increasing contributions 1% every six months, you'll have contributed $750. After five years of increasing by 1% every six months, you'll have contributed about $13,750 in total. And by the 10-year mark, that total will have jumped to $52,500—and $205,000 after 20 years!
The $5 jar is another painless strategy for upping your retirement contributions. Basically, each time that you come across a $5 bill, put it in a jar. After a few months, take your accumulated stash and deposit it into a Roth IRA or another retirement account (side note: just make sure that you qualify to contribute first). Even if you only put in three $5 bills a week, it will add up to $780 within a year—and once you deposit that money, it can grow even more.
- Make the Most of Your Match
Look into whether your company matches retirement contributions, which is a way for companies to encourage employees to contribute to their 401(k)s. Basically, when you make a deposit into your account, the company makes a "matching" deposit of all or a portion of what you've put in. If your company offers this option, just keep in mind that you need to contribute at least the minimum amount in order to get the full match.
- Visualize Your Golden Years
A recent Journal of Marketing Research study found that subjects who saw photos of themselves as 68- or 70-year olds (via virtual aging software) were willing to contribute twice as much money to a long-term savings account than those who looked at virtual renderings of their current selves.
Whether you cut and paste pages from travel magazines of the places you'd like to visit in retirement or use Pinterest to decorate your dream retirement retreat in the south of France, visualization will make retirement seem more real—and far less into the future. "Making your retirement vision more concrete will help create a sense of urgency about saving for it today," Sanborn says.
- Put Your Money in the Right Place
It's a common misconception to assume that retirement income will stay static each year. Things like selling property or taking deductions for unexpected medical expenses can cause income to fluctuate in retirement. For this reason, it's important to put your money in the right types of retirement accounts—and withdraw strategically—to decrease your tax bill.
For example, if your income is too high to contribute to a Roth IRA, look into whether your company has a Roth 401(k) option. If your retirement savings are split 50-50 between a regular 401(k) and a Roth 401(k), it gives you two sources of money to draw from during retirement. Since Roth 401(k) funds are post-tax—you pay taxes on that money when you deposit it, so you won't be taxed on the funds during retirement—it’s a good idea to draw from that account in a higher income year (say, if you sell property), so you won’t be paying income tax at a higher rate
- Test-Drive Your Retirement
“As people get closer to retirement age, it’s important to actually practice for it,” Sanborn says. This means taking time off to try out the things that you think you'll want to do during your golden years. The goal is to ask yourself one key question: Will I be content doing this for 20 or more years?
Sanborn recommends taking about four to eight weeks for the experiment (or as long as you can comfortably be away from your job), even if it's unpaid leave. "The truth is that unpaid leave will give you the best opportunity to practice, since you'll have to really think about how to fund living expenses without a steady paycheck," she says.
During your leave, or even on weekends while you're still working, test-drive one or two hobbies or passions, like learning a new language, taking a painting class or joining a club. "It's important to pursue something that will give you a social support structure when you're no longer interacting with coworkers every day," Sanborn adds.
“Some people end up not being happy doing what they thought they wanted to do,” she says. “You may actually find that you miss working." Ultimately, the idea is to figure out what will truly fulfill you over the course of your retirement—and once you have this knowledge, it will only further motivate you to save enough to reach that goal.