4 ways to plan well for your retirement
The idea of a leisurely retirement for the masses was never a mainstream idea until well into the 20th century. People used to work until they dropped. Now, most can anticipate spending many years in retirement. The larger question is whether one's money will keep pace.
Even if you assume Social Security remains solvent, many Americans will face big financial challenges in coming years.
For example, while the average 401(k) balance stood at $61,346 last year, the median or midpoint account was just $18,986 and actually dropped 2.1 percent from the prior year. Almost 39 percent of 401(k) participants counted less than $10,000, according to figures from the Employee Benefit Research Institute and Investment Company Institute.
Clearly, there's much work to be done. Here are four steps or strategies to consider.
Work longer
Older Americans already are staying on the job longer than in prior years. Of people ages 55 and up, 38 percent were in the labor force last year, up from 29 percent in 1993, according to the EBRI.
The trend was noticeable among both men and women and among various racial and ethnic groups. Motivations for working longer include the need for affordable, employment-based health insurance and the desire to accumulate added investments in 401(k) and similar workplace retirement accounts.
Put it on auto pilot
If you're like most people, the less you think about your investments, the better.
Workplace retirement plans that offer various automatic features are more effective than those that don't, Fidelity Investments says in a report.
Such features include automatic enrollment of new workers in 401(k) plans, automatic increase of their contribution amounts and the use of well-diversified mutual funds as an automatic default choice when people don't select investments on their own.
In retirement plans that embrace such features, more workers participate, they invest more money and they have better-diversified holdings, reports Fidelity, which analyzed 10 million 401(k)-style accounts that it administers.
Consider annuities
The shift from traditional pensions to 401(k)-style retirement plans requires workers to take more responsibility for their finances. It also increases the danger that many could outlive their money because traditional pensions pay regular income for life, but 401(k) plans don't.
To counteract that danger, benefits-consultant Watson Wyatt Worldwide sees more employers offering annuities as investment choices within 401(k) plans. Annuities, after all, allow investors to lock in a regular payment stream for life, as traditional pensions do.
Yet any increased role for annuities within 401(k) plans will add another layer of complexity, according to Watson Wyatt, because annuities come with some unusual and baffling features. Many people will need to lean on their employers, or the advisers they hire, to make sense of it all.
Make sound assumptions
Retirement success rests on good planning. If you base your saving and investment decisions on the right assumptions, you improve the odds of making your money last.
With this in mind, T. Rowe Price Associates recently articulated several general financial-planning assumptions for anyone to consider.
For starters, the firm suggests you plan on earning about 8 percent annually, on average, on investments while you're working and 7 percent or so in retirement. To get there, plan on an 80/20 stock-bond mix while working and a 40/40 split in retirement, with the rest of your portfolio in short-term bonds or cash.
If you expect to retire at 65, plan on living until 95, for a 30-year retirement, advises T. Rowe Price. Assume inflation of 3 percent a year.
You can quibble with some of these assumptions and tweak them to meet your personal situation. Most people won't live to 95, for example. But the above assumptions, on balance, offer a reasonably conservative starting point.
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