With 2020 (finally) coming to a close, it’s time to look ahead to a healthier and richer future. Hopefully Pfizer and friends will take care of the healthier part with a coronavirus vaccine. That’ll leave you and me to focus on building wealth for a comfortable retirement. We can all step in that direction right now by making a few impactful retirement investing resolutions for the new year. Here are three that can kick-start the momentum in your retirement portfolio.
1. Set a savings goal for the year
There are different ways to set savings goals. The most obvious is to settle on a targeted dollar amount to contribute to your retirement accounts for the year. That’s better than not having a goal, but that approach could also work against you. A targeted savings amount in dollars is dependent on factors you can’t fully control — namely, the status of your job. If you get laid off, you’ll fall short of your goal through no fault of your own. And if you get promoted, your original goal will be too low.
Instead, consider setting your savings goal as a contribution rate. A good starting point is to plan on saving 10% or 15% of your income. Even better, establish a minimum contribution rate for the beginning of the year and a higher contribution rate for the end of the year. Many 401(k)s allow you to automate your contribution increases. Use that feature if you have it and set it up now while you’re motivated. Or, if you don’t have a 401(k), set up automated contributions to your IRA, along with a quarterly calendar reminder to raise your contribution amount.
A look at the numbers shows how quickly and easily contribution rate increases can build your wealth momentum. Say you make $55,000 annually and you’re contributing 10% of your salary. That’s $5,500 in retirement contributions for the year. If you get a 3% raise in January, your pay increases by $1,650 but your annual retirement contribution only goes up by $165. You could afford to raise your contribution rate to 11%, which would increase your annual contribution by $730. That small change adds about $57,000 to your retirement account over 30 years, assuming your portfolio grows at 7%.
2. Review your fund expense ratios
Reviewing your fund expense ratios is a resolution that takes a few minutes but could benefit you for years. Fund expense ratios represent the percentage of your investment that’s used to cover a mutual fund’s operating costs. If a fund’s expense ratio is 0.5%, that means expenses are costing you $5 for every $1,000 you have invested. If you switch out that 0.5% expense ratio for a fund that charges 0.25%, you cut those fees in half.
You should know that expense ratios don’t operate in isolation. They are a component of the fund’s return. A strong fund might justify high expenses with even higher returns. Unfortunately, few funds are consistently successful with that approach. That’s why expense ratios are so important for your retirement portfolio. You’re saving for the long term. And over time, a fund with lower fees is likely to do better than a fund with higher fees.
The difference can add up, too. Say you have $50,000 invested in two funds. One fund charges 0.25% in expenses and the other, 0.5%. Both funds are growing at 6% annually. After 30 years, your balance in the 0.25% fund will be about $18,000 higher than the 0.5% fund.
Hopefully, those numbers inspire you to spend a few minutes looking over the expense ratios of your retirement funds. If you can switch out a pricier fund for a similar one with lower fees, consider doing so.
3. Choose an investing topic to study
You don’t have to be an investment expert to save effectively for retirement. But the more you expand your investing knowledge, the more confident you’ll be in your decision-making. To that end, resolve to learn more about one investing topic in 2021. Land on a subject you can apply in your 401(k) such as asset allocation, target-date funds, or the 4% rule. You probably don’t have access to individual stocks in your 401(k), so you don’t need to become a guru stock picker or master number cruncher just yet.
To the future
Take the easy steps now to watch your retirement balance grow in 2021. Set an assertive but achievable contribution rate goal and review those fund expenses. Then spend some time in the coming year expanding your investing knowledge. That’ll set you up for bigger and better retirement investing resolutions in 2022.
