As a saver, investor and future retiree, there are certain things you should do (or at least think about) each year to help ensure you are laser-focused on your retirement goal and on track toward meeting it. If you haven’t done them yet, you still have roughly 8 weeks to check them off your list in 2014.
With that in mind, following are 8 ideas that could bring you that much closer to retirement readiness by the time the calendar turns to 2015:
1. Do a reality check. In order to prepare realistically for retirement, you’ll need to have some sense of how much it will cost you. You also might like to know what your current savings may generate in terms of annual retirement income. BlackRock’s CoRITM tool and the rest of the BlackRock Retirement Center can help you assess both of these.
2. Question your contribution rates. Are you contributing as much as you could to your 401(k) and/or individual retirement account (IRA)? Are you at least earning the company match in your 401(k)? Make adjustments for 2014 while you still have time. In doing so, consider whether you could be “spending” more of your paycheck on your future rather than the present day. (Congratulations to the millennials. As my colleague Heather Pelant wrote, they seem to have caught on to this early.)
3. Ponder the taxing question: Now or later? When looking at your contribution rates, consider where that money is going — into a traditional or a Roth plan. One of the biggest considerations when choosing between the two is your tax rate. The common wisdom goes like this: If you think your tax rate will be lower in retirement than it is now, invest in the traditional plan and pay the tax later (presumably at a lower rate). If you think your tax rate will be higher in retirement than it is now, pay the lower tax rate up front by choosing a Roth plan.
4. Then consider: Why not both? With very few exceptions, we believe everyone should have some portion of their retirement savings in a Roth vehicle if only for purposes of tax diversification. Think of it this way: You diversify your assets (i.e., own a mix of stocks and bonds) so that the risks of one may offset the other. By allocating some of your savings to a Roth plan, you’re gaining some future tax flexibility in that you can manage your withdrawals between the Roth and your traditional plan in an effort to ease your tax bite. Just like no one knows where the stock and bond markets will be years from now, no one knows exactly where income tax rates will be or how high your personal income (and tax rate) at retirement. Why not be prepared for any eventuality.
Of course, income limits preclude some savers from opening a Roth IRA. But rollovers are different. Individuals who: 1) have a 401(k) and, therefore, can make only non-tax-deductible IRA contributions and 2) are not eligible to open a Roth IRA because their earnings exceed the threshold, can make an after-tax contribution to a traditional IRA and then roll that contribution into a Roth IRA. Discuss this strategy with your financial advisor.
5. Take it to the limit. You can contribute a maximum of $17,500 to your 401(k) in 2014. You must do this by Dec. 31. Your IRA contribution limit is $5,500 in 2014, and you have more time to make it — until the April 15, 2015, tax filing deadline. Take a moment to check your progress and consider increasing your contributions to max out your retirement savings. In 2015, your ability to save for retirement is enhanced when the contribution limit for 401(k)s increases to $18,000. The contribution limit for IRAs is unchanged for 2015.
6. Catch up! If you are over age 50, take advantage of catch-up contributions that allow you to add $5,500 more to your 401(k) and $1,000 more to your IRA in 2014. In 2015, 401(k) catch-ups increase to $6,000. That means individuals 50 and older can set aside as much as $24,000 in their 401(k) next year.
7. Review your beneficiary designations. Perhaps you’ve gotten married, remarried or unmarried in the past year. Maybe you’ve had children. Life is a journey, and things change along the way. But the beneficiary designations on your important accounts do not change without you taking action. Talk to your advisor about not only your retirement account beneficiaries, but those on your life insurance policies as well.
8. Check and (re)balance. When some of the investments in your retirement account grow more than others, you may find that the mix of stocks and bonds you had established at the start of the year is now quite different. You’ll want to rebalance back to your intended asset allocation, which presumably is consistent with your retirement time horizon and appetite for market risk.
Finally, I would be remiss if I didn’t mention the most obvious and best advice of all: Meet with your financial advisor each year to review your retirement investment portfolio and to consider how it is doing in getting you toward your savings goal. BlackRock’s Investor Pulse Survey found that the most effective savers and investors are 2.5 times more likely to use financial professionals to help them make investment decisions; they also have accumulated 2.5 times the retirement savings of other Americas. If I’m putting 2 and 2 (or 2.5 and 2.5) together, seems to me that working with an advisor is a good call — at any time of year.
Rob Kron, Managing Director, is the head of Investment and Retirement Education for BlackRock’s U.S. Wealth Advisory group. He provides practical information on topics that are important to every saver and investor of every age. You can find more from Rob here.