Gone are the days when employees worked for decades for one employer and received a decent pension and Social Security to fund a comfortable retirement. Retirement investing is now a consumer’s responsibility. Ultimately, financial decisions made during your life determine your retirement lifestyle. David Thomas, CEO at Equitas Capital Advisors in New Orleans, says, “From the World War II generation to the baby boomers, we saw the shift from Social Security to self-security. The problem is that all too few are providing for their self-security, and the ones that do are not doing enough.” Workers who depend solely on Social Security for their retirement face a challenge.
Most savers take an on-again, off-again approach to putting money away. They contribute what they can, when they can, and hope for the best. But consistent saving gets the best results, new research shows. This points up the value of strategies like automatic contributions and paying yourself first.
Investors enjoy the tax-deferral benefits of retirement accounts. But there’s no avoiding the tax man forever. Without additional funds, outside of a retirement account, a retiree withdrawing from a 401(k) is forced to pay taxes on that withdrawal with money from the account. “A better accumulation strategy would be to split savings into both pretax IRA, 401(k) plans and post-tax savings like a brokerage account invested in low-fee exchange-traded funds,” says Martin E. Levine, a chief financial officer at 4Thought Financial Group. That way, investors can increase the retirement account tax-deferral benefits by withdrawing funds at a slower pace.
Real estate investment trust, known as REITs, and other real estate investments offer another diversification benefit to current retirees and those in the accumulation phase. “The Jobs Act of 2012 changed the game for many investors, opening new doors to diversify their portfolios with more real estate options rather than sticking strictly to stocks and bonds,” said Adam Hooper, CEO and founder of RealCrowd, a crowdfunding commercial real estate firm in Oregon. Real estate investment also tends to be less volatile than the stock market acting as a stabilizer within a portfolio with a strong opportunity for returns, Hooper adds.
With all of the conversation surrounding returns, the most important factor in wealth accumulation is time. An investor who contributes $6,300 per year from age 25 to age 65 and earns 7% annually on the investment can retire with almost a $1.4 million nest egg. In contrast, an investor who starts investing $6,300 per year at age 40 and earns an average 7% annually will only reach $428,000 in savings by age 65. The first investor’s contributions grew nearly five times. This investor contributed a total of $252,000 for 40 years to yield a $1.4 million investment portfolio. While the second investor contributed a total of $157,000 to equal $428,000 at age 65.
Saving through thick and thin over a long period works. Most 401(k) plans make it easy through automatic enrollment, automatic pre-tax contributions and automatic escalation of contributions each year. Don’t opt out. If these features are not available in your plan you can approximate the strategy with automatic contributions to an IRA. In this long-term game, consistency makes the difference.
As your Fresno financial advisor we thought this was a good takeaway: Avoid taking an on-again, off-again money saving strategy. It is a far better idea to remain consistent. Investors enjoy the tax-deferral benefits of retirement accounts. Real estate investment trust, known as REITs, and other real estate investments offer another diversification benefit to current retirees and those in the accumulation phase. And don’t wait too late to begin your retirement savings.
