Retirement should be a thrilling experience. After all, you’ve been working for decades, and now it’s time to kick back, relax, and do anything you want. To do so, you must first ensure that your funds are in order.
Regardless of how far you are from retirement, it is never too late to start planning for financial success.
Here are some wise retirement decisions you can make.
When you approach retirement, you want your assets to become less risky because there is less time to recover from market falls that might drastically reduce their value.
Reallocate your 401(k) investments.
Diversifying away from small-cap and mid-cap funds and towards large-cap funds (like the S&P 500) should be part of your risk-adjustment strategy.
Suppose you contribute to a target-date fund with your 401(k). In that case, the fund will automatically adapt to an increase in conservativeness as you approach retirement, but target-date funds are often more expensive to hold than index funds. A well-rounded 401(k) portfolio can be built with four index funds: large-cap, mid-cap, small-cap, and foreign. If you’re in your 30s and have decades till retirement, your allocations may be as follows:
However, if you’re in your 50s and planning to retire soon, your allocations may be as follows:
What matters is that you alter your allocations to meet your risk tolerance while keeping in mind how damaging too much risk too close to retirement may be for your portfolio.
Create a second retirement account.
To augment your retirement income, you should create a Roth IRA or a regular IRA if you haven’t already. IRAs function similarly to brokerage accounts because you can buy whatever stock you desire, but they come with far higher tax benefits. In retirement, Roth IRAs allow you to withdraw after-tax funds tax-free. Deductions for traditional IRA contributions depend on your filing status, income, and whether or not employer-sponsored retirement plans are available to you.
You should also think about establishing a health savings account (HSA).
As people become older, their demand for medical care grows, which is where HSAs come in. With an HSA, you can save pre-tax dollars for qualified medical, dental, and vision expenditures for yourself, your spouse, and your family. If you spend money on medical bills, which you almost certainly will, you may as well save it before taxes to reduce your taxable income and tax burden.
Dividends are a means for firms to motivate investors to retain their stocks, and they may enhance your retirement income if you have a significant enough holding in them. Take, for example, the Invesco S&P 500 High Dividend Low Volatility Portfolio ETF (NYSEMKT: SPHD), which offers a 3.86% dividend yield. If you invest $100,000 in the fund at that dividend yield, you can expect slightly over $3,500 in yearly dividends after deducting the fund’s 0.30% cost ratio.
The earlier you start investing in dividend-paying equities, the easier it is to build a substantial stake. Suppose you have ten years till retirement and invest $1,000 per month in the Invesco S&P 500 High Dividend Low Volatility Portfolio ETF, earning 8% annual returns and reinvesting dividends. In that case, you will have amassed more than $200,000 in that time, which amounts to more than $7,100 in annual dividend payments.
Dividend income is unlikely to be your principal source of retirement income, but it can supplement other retirement sources like 401(k)s, IRAs, and Social Security. In retirement, every little bit counts.