Oxstones Investment Club™by Walter Updegrave, senior editor
Friday, September 24, 2010 CNNMoney
The road to retirement is littered with distractions. In the hurly-burly of life, so many things compete for your attention that you can lose sight of what really matters most.
That’s where MONEY’s checklist comes in. We’ve created to-do lists for each of the main stages of retirement planning. Think of them as basic reminders you can set aside and refer to on occasion — say, every year or so — to make sure you’re on the right track.
It needn’t be a complicated list. Says Charles Farrell, a financial adviser and author of Your Money Ratios: “Simpler is better. Focus on a few key goals and you won’t miss the forest for the trees.”
TO DO: Mid-30s to early 40s
Goal: Develop the habit of saving. Savings: 1.5 times your annual salary by age 35.
• Take full advantage of my 401(k) match. Your employer-sponsored retirement plan is the easiest way to put your savings on autopilot. And if you take full advantage of your company match, you could earn 50% to 100% on your money before taking on any market risk.
• Boost my 401(k) contribution. As your paycheck grows, your savings rate should too. Sign up for “auto escalation” to boost your contributions by a percentage point or so a year. If your 401(k) doesn’t offer this feature, sock away half or more of each raise.
• Find other tax-advantaged ways to save. Already maxing out on your 401(k)? If you make less than $120,000 — or $177,000 for married couples filing jointly — check out a Roth IRA. Already hitting the $5,000 annual IRA limit? Move on to investment options such as index funds that don’t expose you to stiff tax bills.
• Cover six months of expenses. Make sure you’ve got an emergency stash, so if you get laid off you won’t be forced to dip into your 401(k) and IRAs. Put this money in a safe place like an FDIC-insured bank account or CD, or a high-quality money-market fund.
• Invest for growth. You may feel skittish about stocks, given the recent market turmoil. But with retirement still two to three decades away, your best shot at building an adequate portfolio is to put most of your retirement savings — 80% or so in your thirties — in stocks and ride out turbulence along the way.
TO DO: Mid-40s to early 50s
Main goal: Focus on how you invest your money. Savings: 3 times annual salary by age 45
• Rebalance my portfolio. Periodically reset your holdings in stocks and bonds back to your desired mix to smooth out the market’s bumpy ride. Keep it simple by rebalancing annually on your birthday or after you get your year-end statements.
•Go over my investment strategy. You still need to invest for growth, but now’s the time to start gradually dialing back your stock exposure to guard against another downturn. So if you started your late thirties with an 80% or higher stake in stocks, trim that to 70% or so by your early fifties.
• Make my catch-up contributions. The extra $5,500 you can throw into your 401(k) starting at 50 will not only grow into a surprisingly big stash down the road (see the chart), but will also reduce your taxable income now. You can also stuff a bonus $1,000 a year into an IRA starting at 50.
• Give myself a reality check. Assess whether you’re on course for a secure retirement. The Retirement Planner at CNNMoney.com will tell you the odds of meeting your goals — based on your current balances, savings rate, and investment strategy. It will also let you know how to catch up if you’re off track.
• Consolidate my far-flung retirement accounts. After career changes and job switches, you may very well have left a trail of 401(k) accounts scattered among former employers. Rolling these funds over into an IRA or your current 401(k) will make it easier to manage your entire nest egg.
TO DO: Mid-50s and beyond
Main goal: Decide what type of retirement you want. Savings: 6 times your annual salary by age 55.
• Prune my stock portfolio. Going into the 2008 crash, nearly four out of every 10 401(k) investors in their mid-fifties to mid-sixties had 80% or more of their accounts in stocks. To avoid damage from market meltdowns near the end of your career, scale back your stock stake to 60% or less by your early sixties. And once you’re close to retiring, keep two years’ worth of expenses in cash.
• Map out a blueprint for my retirement. When you quit working, how will you fill the hours of each day? How much traveling will you do? And will you stay put or relocate? Fill in the blanks and create a real budget.
• Run (and rerun) my income plan. A financial planner or the Retirement Income Calculator tool at troweprice.com can help determine if your savings plus Social Security and any pensions will generate enough income — safely — to meet your needs.
• Look into when to take Social Security. Should you collect Social Security benefits at 62, or wait longer to boost your checks by as much as 77%? The Social Security Adminstration’s Retirement Estimator tool will help you map out your options.
• Work on my Plan B. Things don’t always go as planned. So keep your income options open. In case you need part-time employment, maintain ties to colleagues at work even after you retire. And look into ways you can tap home equity, for instance through a reverse mortgage.
Tags: planning, retirement, road map to retirement, savings