Retirement planning today is not what it used to be. Decades ago, retirees could simply shift their investments into fixed income, which historically paid higher rates of interest. Today, those same investments likely pay very little.
Complicating matters further, we’re all living much longer. Now we need to be careful that we don’t outlive our money.
Needless to say, comprehensive retirement planning and careful investment management are more important than ever. In the meantime, however, there are some easy things you can do on your own to help tip the scales in your favor and to increase your income in retirement.
Tip #1: Reduce your investment expenses and fees
Just like inflation can eat into your buying power, any costs related to your expenses reduce your return. The easiest way to increase what you earn is to simply reduce your costs.
Especially if you’re invested in mutual funds and exchange-traded funds (“ETFs”), you’ve probably got hidden fees that you may or may not be aware of. What are these? Typical costs include the expense ratio for each mutual fund or ETF you own. That’s a fee that you pay to the manager of that fund. This fee doesn’t appear on your mutual fund statements, so you have to look for it. This fee is in addition to what you pay your financial advisor, if you didn’t buy the funds direct.
There can be other fees too, such as transaction fees and loads.
Always take these fees into consideration when choosing mutual funds and ETFs. With so many products out there, it’s likely there is a lower-cost, similar option.
If you use a financial advisor, be sure to always ask if he or she is using the lowest cost-options for each investment in your portfolio. Don’t be afraid to ask! This is critically important, as even a small percentage compounded over time can make a significant difference in the future. And it’s unfortunately far too common for investors to be put into more expensive investments, simply because they pay the broker a bigger commission. (You can learn more about this issue in my previous article on fiduciaries.) How common is this? A 2015 White House report estimated it costs Americans about $17 billion per year—so it pays to stay alert for this.
The end result? Even a modest decrease in investment expenses can result in additional yield for you. As importantly, it’s a way to keep your money working harder for you without taking on any additional risk.
Tip #2: Always hold your investments in the most tax-efficient manner
As the old adage goes, it’s not what you make—it’s what you keep, that matters. A second way to reduce costs, also without increasing your risk, is to reduce the amount of taxes you have to pay. One simple method to do this is just to make sure you are holding investments that have the highest potential tax liability in your tax-deferred accounts (like a 401(k) or an IRA).
Conversely, you would then keep investments with low tax loads in your taxable accounts.
For example, investments that may generate ordinary income or short-term capital gains may be best held in your tax-deferred accounts. This might include taxable bond investments, where your interest payments are taxed at higher ordinary income rates. Then, you would keep more tax-efficient investments like tax-free municipal bonds in your taxable accounts.
These small adjustments can help increase the portion of your returns that you keep… all with no extra risk.
Tip #3: Don’t miss out on “catch-up contributions” once you’re 50 or older
Investing in tax-deferred vehicles is one of the few ways we can “turbocharge” our investing without extra risk. But our annual contributions are limited. Fortunately, once we are age 50 or beyond, we are allowed additional contributions. These “catch-up contributions” allow you to go beyond the annual limits and put more into your IRAs, 401(k)s, and other retirement accounts.
If you have a health savings account, there’s a catch-up contribution allowed once you are 55 or older.
All these options allow you to put away more, so you can have more money available to you in retirement. This is a valuable and often underutilized way to boost your retirement savings.
Tip #4: Increase your social security benefit by waiting
While the future for social security may not be certain, for now, it’s still a valid income source. The amount of your social security check won’t likely be big, but there’s a way you can increase it quite a bit just by delaying it a few years. For every year you delay claiming social security past your full retirement age (which is typically 66 or 67), you can get an 8% per year increase until you are 70.
If you’re in good health, this is an easy way to bump up your retirement income, without additional risk.
Smart Retirement Planning
In conclusion, there’s nothing easy about retirement planning today. A lot of work goes into building a portfolio that can take you and your loved ones to the finish line.
If you decide to do it yourself, make sure that you’re careful not to take more, or less, risk than you need to.
If you decide to use a professional to help you, you can definitely relax a bit, but not too much! Remember, it’s your money, and you need to always watch it closely. Don’t put things on auto-pilot. Instead, stay involved, ask questions, and always monitor all your statements regularly as soon as they come in. Your future is too important not to.
John Odell, CFP® is CEO of Arroyo Investment Group, LLC, a fee-only financial planning and investment management firm based in Pasadena, California. As a GIPS®-compliant firm, we bring institutional quality, high performance investment management and comprehensive financial planning to individuals and families. Together with Capital Research + Consulting, our sister firm, we collectively manage over $4 billion of assets for individuals and retirement plans. Visit us at https://arroyoinvestmentgroup.com/.