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You should aim to check these items off your to-do list.
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Are you actively preparing for retirement?
It may be tempting to put off planning for your future if you are focused on keeping out of credit card debt and maximizing the money in your bank account for today’s needs. But, retirement is something you need to work towards throughout your life.
In fact, finance guru Suze Orman has listed six retirement must-dos for 2023. Here’s what they are, along with some advice on whether you should follow each tip.
1. Maxing out your employer match
Orman said as many as 1 in 4 people with a 401(k) are leaving some money on the table by not contributing enough to their 401(k) account to earn the full amount of matching money their employers offer. People who accept their company’s auto-enrollment, rather than setting their contributions themselves, may be especially likely to fall short.
Missing out on your match is a huge mistake since you’re passing up the cash your employer would contribute if you only invested enough. Orman says you can fix this problem very easily, though. “Call up HR and find out what your contribution rate needs to be to qualify for the max match. Make the switch ASAP.”
You should absolutely follow this advice, even if that means making cuts to other things in your budget.
2. Inching up your 401(k) contribution
Orman says if you aren’t yet investing at least 10% (and ideally 15%) of your income in your 401(k), you should increase your contributions by at least 1%.
“Don’t tell me you can’t afford it,” she said. “You can’t afford not to do this. And I am confident a 1 percentage point increase is something you can adapt to.”
This is great advice everyone should listen to. In fact, you should do this right now (you can probably do it online). You likely won’t miss having this extra 1% taken out of your paycheck, but it will make a difference in the long haul to your retirement fund total.
3. Bank your raise
Orman’s third suggestion is to devote at least half of any raise you receive to retirement savings. “You can’t tell me (or yourself) that you can’t afford this, because you’re setting aside new money that you never had hit your checking account before.”
This is also great advice. If you never get used to having the extra money coming in, you can’t possibly miss it — so divert the cash before you even get a single higher paycheck. You’re already living on what you’re currently earning, so this should be a really easy way to invest more in your brokerage account for retirement.
4. Opt for a Roth 401(k)
Roth 401(k)s don’t offer you a deduction for contributions in the year you invest in them. Instead, you get to take money out of this account without paying taxes on withdrawals. Orman (and Dave Ramsey) both prefer Roth accounts. In fact, Orman has such a strong preference that she recommends limiting 401(k) investing if your employer doesn’t offer a Roth.
“If your plan doesn’t have a Roth option, your strategy should be to contribute just enough to the traditional 401(k) to qualify for the maximum matching contribution,” Orman advised. “Then do more retirement saving in a Roth IRA.”
This advice makes sense for some people — but it depends on whether you expect your tax bracket to be higher or lower in retirement. If you think you’ll be in a lower bracket as a senior, you may be better off using a traditional account and getting an upfront tax break for contributions.
5. Using a Roth to save if you don’t have a 401(k)
Orman says anyone who doesn’t have a 401(k) should set up a Roth IRA at a brokerage firm and invest in funds or ETFs within the account.
Setting up your own tax-advantaged retirement plan is indeed good advice, as is selecting a total-market index fund to invest in, which is what Orman recommends. But, again, you should think about whether an upfront or deferred tax break makes the most sense when deciding between a traditional and Roth IRA.
6. Review your asset allocation
Finally, Orman says you need to be sure you’re invested in the right mix of assets given your current risk tolerance and investing timeline.
“If your 401(k) plan doesn’t offer automated rebalancing, it’s up to you to check that your mix of stocks and bonds is where you want it to be,” Orman said.
This is also a very important tip to follow as you don’t want to be too conservative and risk lower returns, nor too aggressive and risk big losses. If you aren’t sure, one rule of thumb is to subtract your age from 110 and put that percentage of your portfolio in stocks.
As you can see, most of this advice from Orman is great and you should aim to take as many of these steps as possible in 2023 so you can set yourself on the path to a more secure future in your old age.
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