NYT Financial Tuneup Day 4: Retirement

Day 4 of the NY Times 7-Day Financial Tuneup is about retirement. (Sign up for your own personalized tune-up here.) This assumes you are eligible for a 401(k) or similar retirement plan. The key action point is bumping up your retirement contribution rate by 1% and perhaps adjusting your asset allocation if necessary. Here’s a simple chart showing you why:

If you’re making $50,000 annually and contributing 5 percent of your salary to your retirement account, assuming an annual return of 6 percent and a 3 percent annual salary increase, in 25 years, you will have about $198,000 in your retirement account. If you start to increase that percentage by 1 percentage point annually however, you will have over $550,000 in that same account in 25 years. By increasing the amount you save by 1 percentage point each year, you’ll save an extra $354,940 for retirement.

Increase Your Savings

• Log into your retirement savings account. (Baby steps…)
• Increase the amount of money taken out of your paycheck by 1 percentage point annually. Also check to see if you are taking full advantage of any company match.
• Make it automatic. If you have the option, set it to automatically escalate in the future.

Rebalance Your Account

• Log into your retirement savings account.
• Determine how you should rebalance your account. What is your target asset allocation? Here’s mine but it’s probably more complicated than most people need. Consider a target-date fund, especially if it is a low-cost, passive version. Fidelity, Vanguard, and Schwab all have solid versions. I put my own mom in the Vanguard one.
• Make it automatic. If you have the option, set it to automatically escalate in the future. My provider calls it “Auto-Increase”.
• Rebalance your account. Basically, make sure your portfolio is still what you want it to be, as it may have shifted over time. You only need to do this once or twice a year, or you can set “bands” to rebalance when things get too out of whack.

Action, action, action. This move won’t make you save enough for retirement by itself, but it’s something tangible. If you are really going for financial freedom, you should use this as a platform to do even more. We have our 401k savings rate already set at 60% (max allowed by one provider) since we are working part-time (“semi-retired” sounds better!) with a lower income but still want get as close to the annual 401k limits as possible.

Financial Tuneup Recap (still in progress)

• Day 1: Optimize Your Thinking
• Day 2: Trim Your Budget
• Day 3: Finding Better Credit Cards
• Day 4: Retirement (this post)
• Day 5: Credit Report
• Day 6: Insurance
• Day 7: Emergency Fund
• Alternate Day 6: Flexible Spending Accounts
• Alternate Day 7: Student Loans