You want retirement to be your chance to get out of the rat race and have time for the things you’ve always wanted to do. That’s great, but what exactly does that mean? Travelling? Volunteering? Spending time with family and friends? Starting a business? Simply doing nothing?
You may think your plans are just like everyone else’s, but that’s unlikely. They’re as unique as you are.
As we’ll discuss, exactly how you want to spend your time will definitely affect what you should be doing now to prepare for it. However, there are steps that everyone should consider taking today regardless of their retirement goals. Here are six of the most important:
1. Have a plan
If you haven’t gathered your ideas about retirement together and distilled them into a cohesive investment plan, that’s a great place to start. Or if you have a plan stuck in a drawer somewhere, you need to revisit it.
Whether you want to start a second career, travel the world, or just do nothing will make a big difference when it comes to what you’ll need to cover your expenses. The better you can define precisely what your goals are and which are most and least important, the better your plan should be.
An asset allocation – how your investments are proportioned across different asset classes (stocks, bonds, cash alternatives, etc.) – should be at the heart of your plan. The allocation that’s appropriate for you will vary depending on a variety of factors. Primarily, these are what you want your investments to help you achieve (objectives), how comfortable you are with market volatility (risk tolerance), and how long it will be before you plan to retire (time horizon).
2. Use tax-advantaged accounts
Even if you don’t yet have a plan for retirement as such, chances are you may already have savings in employer-sponsored qualified retirement plans (QRPs), such as 401(k), 403(b) plans, or governmental 457(b) plans, or a traditional or Roth individual retirement account (IRA).
If that’s the case, good for you. These tax-advantaged accounts can be great ways to work toward your retirement goals because they are designed to allow you to defer paying taxes on any growth, as you would have to do every year with a taxable account, which can dramatically reduce your growth potential.
If you participate in a QRP and your employer offers a matching contribution, try to contribute at least as much as the match – otherwise, you are leaving free money on the table. If your employer doesn’t offer a QRP or you’re self-employed, look into the potential benefits of opening an IRA.
3. Clean up your accounts
Over the years, you may have accumulated a number of IRAs and QRP accounts with your current and past employers. Along with that, you may own taxable investments in different full-service and online accounts. And your spouse or partner may be in a similar situation.
Having a portfolio in pieces like this may make it more difficult for you to reach your retirement goals. Take time to figure out how many accounts you actually have, and consider the potential benefits of consolidating them, including helping you to:
- Understand how your assets allocated
- Decide when it’s time to rebalance
- Know exactly what investments you own
- Save time
- Manage your beneficiary designations
4. Try to stay in the market
When the market takes a big hit, you may be tempted to sell investments with the intention of getting back in when the things turn around. This practice, known as market timing, may sound good, but as we’ve all seen, the market can be extremely unpredictable, making success with this strategy very difficult.
If you get out when the market’s down, you could miss out on significant gains if it suddenly turns around before you get back in. And that can prove costly.
Rather than attempting to time the market, consider keeping your current asset allocation when there’s market volatility unless something major has happened in your life (a birth, marriage, illness, divorce, etc.) that makes you want to change it.
In addition, consider rebalancing once a year by checking your accounts to see if market activity has shifted your investments away from your desired asset allocation. If it has, you may want to sell some investments and buy others to bring your accounts back into alignment.
5. Prepare for emergencies
Events like a sudden job loss or unanticipated home repair can quickly derail your retirement plans. To help protect you and your family, consider keeping an emergency fund with enough money to cover three to six months of living expenses.
These funds should be held in a liquid but stable account, such as a bank savings account, so you can access them when needed and not have to worry about fluctuations in value.
6. Consider an advisory account
If you’re not comfortable with or interested in managing your retirement savings, consider using an advisory account.
These accounts are run by professional money managers who choose the investments, make buy and sell decisions, and periodically readjust the holdings in the account to maintain your chosen asset allocation. Instead of paying commissions for trades in an advisory account, you are charged a management fee based on the value of the assets in your account.
Investing involves risk, including the possible loss of principal. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. Diversification does not guarantee profit or protect against loss in declining markets. Stocks offer long-term growth potential but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.