Dear MarketWatch,
I have a question about retirement, but first, some background. I am a 50 year old female who has been working in the same job for 25 years. I am not financially savvy at all. As I approach retirement, I am starting to worry that I will not have enough money to live comfortably once I retire.
As of today, I have $1.2 million in my 401(k), making the maximum contributions each year. I also have $615,000 in company stock and $25,000 in an Employee Stock Purchase Plan (ESPP). Plus, I will have Social Security.
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So my question is: What can I do to increase my retirement savings? Don’t suggest real estate or the stock market. I live in New Jersey, where real estate prices and property taxes are quite high, and the stock market scares me!
Cautious but prepared
Related: My husband makes more money than me. If I file for Social Security at age 72, will I get more spousal benefits?
Dear Prudent,
For someone who is not financially savvy, you have done a fantastic job of building up this small nest egg.
I understand your hesitation about the stock market—it can be scary—but even without knowing what your retirement account asset allocation looks like, I can only assume that you owe at least some of your $1.2 million to the stock market. You’ll also one day thank your company stock and Employee Stock Purchase Plan (ESPP), because they too had a say in the market.
You probably used a combination of the stock market and real estate to get to $1.2 million, said Alex LaRosa, a certified financial planner at Blue Bell Wealth Management. “So if it ain’t broke, why fix it?”
I also understand wanting to avoid the real estate market. Rental properties can be lucrative, but they also require a lot of maintenance and money, and if you already live in an area with a high cost of living, you need the funds and determination to make this type of income stream work for you.
But there’s good news for you: You don’t have to be an active investor to keep growing your investments. You will, however, need to be active in your planning.
If stocks aren’t for you but you’re not afraid to invest in other ways, consider fixed-income securities, such as bonds. One option is a diversified bond portfolio, said Samuel Wagner, a certified financial planner and chief financial officer at WealthGuides. “It’s a great way to mitigate risk—less volatility than stocks—and you earn income from the interest the bonds earn. That income can be used to fund your retirement expenses, just like a paycheck.”
With this in mind, think of it as a “bond ladder,” says Ashley Foster, a certified financial planner and founder of Nxt:Gen Financial Planning. The “ladder” refers to the different maturity dates: If you spread them out, you can spread your income out over a longer period of time.
You will receive the bond interest and principal once the bond matures, Foster said.
Bonds are not a panacea, however. They carry their own risks, such as interest rate fluctuations.
Cash and certificates of deposit
Sure, there are other options, like simply saving money or using CDs, but those options often come with inflation risk. Today’s CD rates won’t last forever, and you need your money to work for you so it not only continues to grow, but grows enough to keep up with or outpace the rising cost of living. Someday, those rates may no longer be able to do that (and certainly not the rates on your traditional bank account either).
However, if you’re really set on avoiding the stock market, take a look at the spending side of your retirement plans. Preserve that little nest egg for as long as possible without touching it so it’s there throughout your retirement. You didn’t say how much money you think you’ll need in retirement, or whether you have a lot of debt, but these are things you’ll need to get a handle on to keep your finances in tip-top shape. Plus, as you might expect, the less money you need to spend each year in retirement, the less you’ll have to draw on your retirement account.
If you don’t take dividends from this account, “it would be relatively easy to continue growing the account without using riskier assets,” said Crystal McKeon, a certified financial planner and compliance officer at TSA Wealth Management. That’s because your account is already working for you.
Develop an action plan for your company’s actions and your ESPP, and outline what you can expect from Social Security based on different claiming ages—at age 62, at full retirement age, or at age 70. Have a plan in place for your other income streams can mean giving your 401(k) more time to work on earning more money.
You’ll eventually need to use them, if only for your own expenses, because required minimum distributions will kick in, and if you delay withdrawing the money until then, you could be facing some pretty large withdrawals. Here’s more information on RMDs.
Check Your 401(k) Asset Allocation
When thinking about your 401(k) and how to protect it, make sure the asset allocation reflects your goals. Keep in mind your risk tolerance—the amount of risk you can handle emotionally—but also keep in mind your overall retirement goals. You’ll need to strike a balance here, but it’s for the greater good of your future finances.
Checking your account from time to time, at least once a year, is also a good habit to ensure that the vehicle is still operating smoothly to your destination.
There’s no one-size-fits-all approach to investing in a 401(k), but there are some basic rules, like 60/40 (where 60% is invested in stocks and 40% in bonds). If you’re not sure what you’re considering, consult a qualified and trusted financial professional, even if they work at the company that hosts your accounts, to get a feel for it. Here’s a letter I wrote to another reader about how to make sense of your asset allocation.
Another common rule in the financial services industry is the 4% rule, which states that if you withdraw 4% from your account each year, you will be able to use that account for approximately 30 years. The percentage itself has been contested many times, with some people arguing that the rate should be much lower, but it will give you an idea of what financial situation you will be in based on your future financial needs.
The best thing you can do for your future is to continue to do the due diligence you’ve been doing about your future. You’ve worked hard, you’ve saved, and you’ve set up multiple income streams for the future. That’s a good start. With a little more research and a few action plans under your belt, you’ll be well positioned for the future.
