20 July 2018

8 Steps To Building A Better Nest Egg

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Imagine for a moment you're ill-prepared for retirement and don’t know what specific actions could change that situation.

Stephen Wendel, head of behavioral science at Morningstar, an investment research company, recently laid out eight changes that could help retirement savers do a better job of building a nest egg.

According to a paper by Wendel, the actions fall into three categories: 

  • Financial planning (adjusting one’s standard of living in retirement, delaying retirement and increasing contribution rates). 
  • Investing (increasing net returns from investing, using a more aggressive asset allocation). 
  • Investor behavior (signing up for increased contributions over time and choosing whether to invest one’s savings at all).
 

And here's some good news: Austerity isn’t necessary to reach your retirement goals, according to the report, "Easing the Retirement Crisis: How financial planning and personalized advice can head off extreme austerity." 

Instead, Wendel found that combining multiple, less-extreme changes – delaying retirement, contributing more to your 401(k) plan and lowering one’s expectations for retirement – can be tremendously effective at improving retirement readiness. 

“If Americans delayed retirement until at least age 67 and contributed at least 6 percent (to their retirement accounts) ... that would boost the percent of American households having what they need from 25.6 percent to 71.2 percent," Wendel wrote in the report.

But Wendel found that a one-size-fits-all approach to achieving retirement goals doesn’t work. “For example, delaying retirement can be very impactful for one individual but not particularly effective for another,” he wrote. What’s more, he wrote that “personalized advice is essential to help Americans succeed.”

What do financial advisers say about the research?

Lower your standard of living 

Adjusting your standard of living is difficult for anyone to do, but a good place to start is by examining your budget, says Matthew Gaffey, a senior wealth manager with Corbett Road Wealth Management. “Take the time to truly detail each of your expenses for a few months, and you will most likely find that there is some ‘low hanging fruit’ that you can eliminate,” he says.  

For example, what memberships/clubs do you have/belong to that you are not using –  the gym, magazine subscriptions, premium cable channels and the like?

Delay retirement 

Delaying retirement doesn’t come with the same stigma that it used to. In fact, many people retire only to go back to work, Gaffey says. And it’s not because they need the money; it’s because the idea of sitting on a rocking chair “getting old” doesn’t appeal to them, he says.

Increase your savings 

Increasing contribution rates to your 401(k) or retirement accounts can be a tough pill to swallow when you do it all at once. “Instead, focus on increasing your contribution rate by 1 percent of your income every year,” Gaffey says.

Investing for success 

If you invest your own money and want to get a better return in the market, start by truly examining the person you see in the mirror, Gaffey says. How do you evaluate and select investments? Note, Gaffey says, that the average investor consistently lags the benchmark, regardless of whether it is in stocks or bonds. “If you do a true self-assessment of your management of your portfolio and admittedly lack the skill, the will or the time to manage your portfolio, it probably makes sense to speak with a professional,” he says.

It’s all about baby steps 

Many of the actions that you can take to better prepare for retirement begin with baby steps, Gaffey says. “You don’t go from being out of shape to running a marathon overnight,” he says.

Discipline required 

While it is not the case with everyone, achieving financial security or preparing for retirement is like many other things in life that require discipline, Gaffey says.

“For example, I know that if I want to be healthy and/or lose weight, I have a much higher likelihood of accomplishing that if there are certain actions I take and/or decisions I make,” he says.  “If I am serious about losing weight, I should put together a plan on how to attack the problem, exercise regularly, change my diet to incorporate better food and smaller portion sizes and make generally better decisions surrounding my overall health.”

That doesn’t mean, Gaffey says, that you can’t have the occasional glass of wine or piece of cake, but those really need to be more of the exception than the rule.

Buy an ALDA 

One risk that you’ll face in retirement is something called longevity, the risk of outliving your money. And one way to manage that risk is by purchasing a type of annuity called ALDA, or longevity insurance.

ALDA "is more of an insurance against a person's longevity,” says Kerry Uffman, founder of TWRU Private Wealth Management, in Baton Rouge, Louisiana. “Typically, people who purchase an ALDA are older, say ages 50 to 60, and use 10 to 30 percent of their retirement savings to fund it.”

The ALDA would start paying the owner a stream of income for life, starting at age 80 or 85, for instance.

According to Uffman, buying an ALDA allows retirees to split their wealth into two time horizons: before age 85 and after.

A reverse mortgage with line of credit at age 62  

Having a reverse mortgage with a line of credit provides homeowners with money they can tap into later in life. What’s more, Uffman says, the line of credit grows at a rate higher than that of a conservative investment portfolio.

A reverse mortgage loan allows homeowners to borrow money using their home as security for the loan, just like a traditional mortgage, according to the Consumer Financial Protection Bureau. Unlike a traditional mortgage, though, borrowers don’t make monthly mortgage payments.

Click here for the original article from USA Today.

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