3 Small Moves that Make a Big Difference in Retirement

Share Post: facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.

Saving for retirement doesn’t happen overnight. It’s an ongoing process that requires monitoring and tweaking your plan over many years to help ensure you have enough to meet your retirement goals.

Sometimes relatively small adjustments to your plan can make a huge impact on your ability to save, such as choosing to invest in low-cost index funds or increasing retirement savings by just 1% per year. Here’s a closer look at three savings-boosting strategies you can implement. 

  • Make a Minor Increase to Your Savings Rate

Boosting retirement savings doesn’t require major shifts in your contributions. In fact, small increases can have a big impact.

For example, let’s assume you receive a starting salary of $75,000 with a 3% raise every year. Your monthly contribution is 6% of your income with a 7% annual investment return. After one year, your balance would be around $8,225. But increasing your contribution by just one percentage point to 7% a month could boost your savings to $9,004 in the same year.

What’s more, many employers will allow you to automate your savings and divert a percentage of each paycheck to your retirement account. This can allow you to auto-escalate your savings, increasing your contribution rate by 1% each year or every time you receive a raise. These small increases can add up over time. In fact, one study found auto-escalations can increase retirement savings by 11% to 28%.

  • Extend Your Retirement Date

The longer you hold off on retiring, the more time you will have to save and take advantage of compounding returns. But you don’t need to push your retirement back much to gain significant benefits.

A study by the National Bureau of Economic Research found that a 66-year-old who works one additional year before retiring and drawing Social Security benefits could increase their retirement income by 7.75%.[1] Researchers also found that delaying retirement by three to six months has the same financial impact on retirement income as having contributed an additional percentage point of their salary to their retirement accounts for 30 years.

Let’s say you have $1,000,000 in your 401(k) and max out your contributions at $1,875 every month. At a 7% annual return rate compounding annually, you would gain an additional $92,500 after one more year of work and $191,475 after two years.

  • Use Low-Cost Index Funds

Actively managed mutual funds and index funds differ in a few key ways. Index funds invest in a specific list of securities tied to a particular index. On the other hand, actively managed mutual funds include a changing set of securities managed by a person or team who makes frequent trades to try to boost your returns. Investors pay higher fees to cover the administrative costs of active management, while index funds typically charge lower fees because they are passively managed and don’t require frequent trading.

The expense ratio, or operating costs of a fund, typically ranges from about 0.5% to 1.5% for mutual funds and about 0.2% to 0.5% for index funds. While these fees may seem small, they can potentially take a big bite out of your savings in the long run, compounding along with your investment returns.

For example, say you invested $100,000 in a fund with a 7% return rate, and you contribute $1,875 every month. At an expense ratio of 1%, you will pay about $219,260 in fees over 30 years. That number goes down to about $60,325 in fees at an expense ratio of 0.25%.

Planning for retirement doesn’t have to be all or nothing. Small changes can make a big difference. Work closely with your financial advisor to understand whether there are adjustments you can make to your plan that could help you maximize your savings in the future.

 

Sources:

The Power of Working Longer Gila Bronshtein, Jason Scott, John B. Shoven, and Sita N. Slavov NBER Working Paper No. 24226 January 2018 https://www.nber.org/system/files/working_papers/w24226/w24226.pdf

Working Longer Can Sharply Raise Retirement Income _ NBER. Laurent Belsie. https://www.nber.org/digest/may18/working-longer-can-sharply-raise-retirement-income

Compound Interest Calculator _ Investor.govhttps://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator

The Expected Impact of Automatic Escalation of 401(k) Contributions on Retirement Income. Jack VanDerhei. Sep 12, 2017 https://www.ebri.org/content/the-expected-impact-of-automatic-escalation-of-401(k)-contributions-on-retirement-income-3844

Trends in the Expenses and Fees of Funds, March 2022 https://www.ici.org/system/files/2022-03/per28-02_2.pdf

Mutual Fund Calculator_ Find What Fees Will Cost You – NerdWallet. Voigt, Kevin. Jan 31, 2023. https://www.nerdwallet.com/article/investing/mutual-fund-calculator

Investor Bulletin_ How Fees and Expenses Affect Your Investment Portfolio https://www.sec.gov/investor/alerts/ib_fees_expenses.pdf

This piece is not intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.

Information provided by Valorem Financial and written by Oechsli a non-affiliate of Cetera Advisor Networks, LLC and CWM, LLC

[1] National Bureau of Economic Research, “Working Longer Can Sharply Raise Retirement Income,” 2018.

Share:
facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.
Share Post: facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.

RECENT POSTS

What You Should Know About Advisor Fees

Financial advisors and planners help you manage your investments and work toward your financial goals, such as estate and retirement planning. In return for their knowledge and guidance, some advisors will charge a flat fee, while others work on commission. Some may even do both. But how ar …

Instilling Financial Values in Your Family

Over the next two decades, more than 84 trillion dollars will change hands in what has become known as the “great wealth transfer.” More than $72 trillion of that will pass from older generations to their heirs, while nearly $12 trillion will be donated to charities.[1]

Your Silicon Valley Bank Questions Answered

You likely have heard about the recent Silicon Valley Bank (SVB) collapse and probably have questions. Here, we provide you with unbiased answers to your questions.

Thinking About Retiring Early? 8 Things to Consider First

Tom Fridrich, JD, CLU, ChFC®, Senior Wealth Planner We’ve all asked ourselves whether it’s too early to retire (usually after a particularly challenging commute or dealing with a difficult client).  You may have even gone so far as to take a sneak peek at your account statements …

1 2 3 108 109 110

Get in Touch

In just 15 minutes we can get to know your situation, then connect you with an advisor committed to helping you pursue true wealth.

Schedule a Consultation