Safeguarding your retirement savings in today’s economic climate requires more than a casual approach. Complacency may be the most significant risk to your financial security, especially for retirees. With potential changes in business cycles and an uncertain future, inactivity could be the proverbial deer in the headlights, putting your retirement plan at risk.
That means taking proactive measures to protect your retirement savings to ensure a worry-free post-retirement life. The importance of b...
Safeguarding your retirement savings in today’s economic climate requires more than a casual approach. Complacency may be the most significant risk to your financial security, especially for retirees. With potential changes in business cycles and an uncertain future, inactivity could be the proverbial deer in the headlights, putting your retirement plan at risk.
That means taking proactive measures to protect your retirement savings to ensure a worry-free post-retirement life. The importance of being involved with your retirement money can’t be overstated. We’ve all spent years dreaming about our dream retirement—and with the proper planning, that’s precisely what we can get.
Typically, that means finding the right balance of safety, growth, and income rates to create a healthy retirement account.
So let’s talk about how to keep retirement money safe!
The Risks of the Current Environment
Retirees may find the current financial environment challenging depending on their investment temperament. The conservative investor looking for stability and some yield for their savings might struggle with low-interest rates on savings plans. Add in market volatility and inflation, and even a seemingly stable investment might fail to keep pace, reducing the future purchasing power of your retirement income. Recently, there’s been the added fear of “What if my bank fails?”
On the other end of the spectrum, aggressive investors might feel like they’re treading water. Those with a diversified portfolio of stocks, bonds, and mutual funds might have noticed stagnant growth or even losses in the past year. The fear of future financial security may lead to rash decisions that could harm long-term goals.
Engagement and Education: Your Armor Against Uncertainty
The best defense against these challenges is engagement and education. Investing an hour daily to deepen your investment strategies and knowledge can yield considerable benefits. There are many resources, from YouTube and blogs to podcasts, designed to help you learn how to achieve the highest yield with the lowest risk. However, while you broaden your financial horizons, remember to be discerning and a bit cynical. Not all information is reliable, and some may even lead to financial harm.
Building Your Network of Advisors
While you educate yourself, consider building a network of advisors. These individuals can offer second opinions, answer your queries, and provide insights into your investment strategies. This network could include your tax consultant, a financial advisor, an investment club, or friends successful at investing. I recommend the “trust but verify” approach. This helps keep your mind open while also introducing a measure of risk mitigation to your decision-making process.
Proactive Steps to Protect Your Retirement Savings
Education and understanding where you stand financially are essential to ensuring a healthy retirement income. But what does that look like?
When looking to combat financial complacency, consider taking the following proactive steps:
1. Review Your Savings Account Yield: In the high-inflation economic environment of 2023, compare your savings yields to inflation. If your yields are too far below inflation, you lose more than you earn! So, if your bank savings or CDs earn less than 4%, it’s time to shop around for a better yield.
2. Monitor Your Monthly Expenses: Creating and following a budget is always a sound financial decision! Scrutinize your expenses and eliminate unnecessary costs or forgotten subscriptions. Every penny saved contributes to your retirement security. With the rising cost of day-to-day living expenses, every little bit helps!
3. Strategize Your Required Minimum Distributions (RMDs): If you’re withdrawing RMDs from your IRA, be thoughtful about which accounts or investments to draw from. Selling an investment with a temporary dip could hamper the recovery rate of your portfolio.
4. Become a Tactical Investor: Consider investing strategically. With market volatility high, it’s critical to understand where we are in the business cycle. We’re in a peculiar phase of that business cycle that could last another year. Those with more savings than they need may be able to ride this phase out. But if you need your savings for future healthcare or life expenses, this is the time to deepen your knowledge and expand your network of experts. The goal is to position your savings for the best risk/reward ratio possible.
Timing is Everything
First, if you’re not retired and haven’t started saving for retirement, start! The best time to start saving is yesterday—the second best time is today. It’s likely your employer offers a 401(k) or similar plan, and signing up is typically a simple process.
For those who have already retired or are preparing to, don’t forget to consider your full retirement age (FRA). While you can start receiving Social Security benefits if you retire early, you won’t receive your full benefit. However, delaying Social Security until reaching FRA guarantees full benefits. Furthermore, these benefits progressively increase each year you wait beyond your FRA.
Timing your RMDs is also important. Yes, Required Minimum Distributions are required for 401(k)s and traditional IRAs. But when you begin taking RMDs is based on your age, not your retirement status. In fact, the age requirements for RMDs were recently extended! The longer your plans remain untouched, the more your investments can grow. So, if you can afford to, consider waiting until the legally-required age for RMDs.
Explore Your Options
When it comes to saving for retirement, you have many options. Just like a diversified portfolio is essential for maximizing investment earnings, a diversified selection of retirement plans can help optimize your retirement income.
A good mix of workplace retirement plans (401k), defined contribution plans (IRA, etc.), and defined benefit pensions (if available) can offer diverse investment options, income sources, and tax benefits.
For instance, contributions to a traditional 401(k) or IRA are tax-deductible, meaning they reduce your taxable income for the year you make the contribution. However, when you start making withdrawals in retirement, those will be taxed as ordinary income.
On the other hand, contributions to a Roth IRA are made with after-tax dollars. While this offers no immediate tax benefits, your money can grow tax-free. In addition, you won’t owe income tax on distributions you take during retirement.
