If the stock market and your declining 401k balance are making you feel like you’ll never be able to fully retire or become financially stable…you’re not alone. As the market is still on a rollercoaster and much is out of your control, there are some important things you should be doing. The below financial and retirement resolutions are steps you should be aiming for:
In Your 40s
1. If you haven’t started already, open an IRA and/or fund a 401k. These are generally the years when it’s toughest to scrape together the cash for investing, but starting young and having decades for tax deferred growth could provide a nice six or seven figure portfolio in retirement. At a minimum, save enough to get your full company match.
2. Since you will likely have 2-4 decades before you’ll need this money, consider investing 70 percent – 80 percent in equities/stocks. Do not be too conservative with your allocation.
3. Remember that your ability to earn an income is your greatest asset so go back to school, continue your education, network and do your best to make sure your job/company/career offer growth potential to carry you into your 60s and 70s. To navigate the employment landscape you will need to be nimble, be constantly learning and continually reinventing yourself to stay employable.
4. Like people in their 50s and 60s, you too should reduce and pay down your non-deductible debt such as credit cards and auto loans. Try to be debt-free, perhaps with your mortgage being the only exception, by the time you retire.
5. Finally, if you haven’t done so already, meet with a qualified estate planning attorney to have basic estate documents drawn up including wills, health care proxies, living wills and powers of attorney. Additionally, make sure you have adequate life, disability, homeowners, and umbrella liability insurance to protect you and your family.
In Your 50s and 60s
1. If you haven’t maxed out your 401k/403b contributions at work, you are eligible to take advantage of what is known as the catch-up provision. In essence, if you haven’t saved as much as legally possible every year you’ve been working, you are able to contribute an extra $5,500 per year (over and above the legal limit – $16,500) into your retirement plan in 2011.
2. If you have a spouse, family and assets to protect, you should investigate long-term care insurance. Long-term care protects you and your family from the emotional, physical and financial pain that a health issue can have on them. Take advantage of 10-pay plans which allow you to pay the entire cost of the policy off in 10 years, while you still have earned income, a job.
3. Start paying down your non-deductible debt such as credit cards and auto loans. Try to be debt-free, perhaps with your mortgage being the only exception, by the time you retire. If you can pay off your mortgage too, more power to you. This can free up a lot of cash flow and keep your expenses low in retirement.
4. Review your investments and asset allocation. Make sure you’re not too heavily invested in equities (no more than 50 to 60 percent) or your own company stock (no more than 10 percent).
5. Consider accumulating up to three years worth of income in savings, CDs, money markets or treasury bills. This is where you should start taking money from when you retire. Use this “safe-money” benchmark strategy so the money you need is in the safest yet lowest-yielding investments where your principal is protected. It helps to weather the ups and downs of the stock/bond markets where the rest of your long-term money is allocated and diversified properly.
6. Finally, review your estate plans with an estate planning attorney and consider reducing and eliminating unnecessary insurance coverage to free up cash flow for income in retirement.
Two Steps to Make Resolutions Stick
1. Automate the savings process either directly through payroll deduction or monthly deduction from your checking/savings account.
2. Hire a fee-based advisor to coach you, keep you on track and accountable for achieving your goals.
Bill Losey, CFP®, CSA, America’s Retirement Strategist®, is a financial advisor, author and TV personality with more than 20 years experience in financial services.