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9 Ways To Improve Your Retirement Readiness


9 Ways To Improve Your Retirement ReadinessIt is Thanksgiving week. Can you believe 2015 is almost over? Time seems to pass faster and faster every year. So how have you prepared for retirement this year? There are just a few weeks left and that’s not a lot of time. If you have been saving and investing, you should be well along and probably need to do just a few things to finish the year off on a high note. Here are 9 ways to improve your retirement readiness.

1. Max out your 401k (or equivalent)

The 401k plan is the easiest way to save for retirement. An employer sponsored plan will automatically deduct from the paychecks to contribute to your 401k. This makes retirement saving relatively painless and you won’t even notice it. For 2015, the contribution limit is $18,000 per year. If you’re 50 and older, you can contribute up to $6,000 extra.

If your employer has a decent 401k plan, you should try to max it out. If your income isn’t very high, then at least contribute enough to get the full amount of employer matching. See what happens if you always maxed out your 401k.

2. Max out Roth IRA

The Roth IRA is another way to beef up your retirement saving. I love my Roth accounts because I never have to pay tax on it again. For 2015, the IRA contribution limit is $5,500. If you’re 50 and older, you can contribute up to $1,000 extra. You should contribute up to the limit every year. The Roth IRA will help you optimize your tax strategy in retirement. If you don’t have a Roth IRA yet, what are you waiting for? Here is how to start contributing to a Roth IRA.

3. Beef up your taxable brokerage account

I realize $23,500 ($18,000+$5,500) is a lot of money to invest already, but you need to save even more if you want to retire early. When I was an engineer, I always maxed out my 401k and Roth IRA every year AND invested more in our taxable account. The tax advantaged accounts are great for your later years when they are readily accessible. However, you will need to fund your early retirement from other sources. Your taxable account can help fill that role.

4. Grow your active income

Whew, that’s lot of money to put away. It’s particularly difficult if you don’t make a decent income. This is one area where you don’t see much coverage from personal finance blogs. You really need to grow your income so you can save. If you’re barely making enough to survive, then saving retirement saving is going to be impossible. Raising your income is very important in the early years. This will set the tone for your career and income.

  • Get raises via promotion, job change, or backstabbing (kidding.)
  • Get into well paid careers that doesn’t require a ridiculous amount of education. Avoid being a physician if you want to retire early.
  • Become a specialist at your company where you will have more pull.
  • Side hustle and make some money outside of your day job.
  • Open a small business on the side.

5. Grow passive income

You need some passive income if you want to retire early. For 2015, I added some money to our dividend portfolio to increase our dividend income. I’m also rehabbing our rental and will increase the rent for the next tenants. It is hard work to increase your passive income, but it will be worth it when your passive income can pay your monthly expense. That’s when you can follow your own agenda and don’t have to worry about working for money anymore.

6. Rebalance

It has been a pretty crazy year for the world stock market. The US stock market has done relatively well compared to foreign markets. If you haven’t rebalanced in a while, your asset allocation might be over weighted with US stocks. I usually rebalance by adding new funds in the area that’s weak. If things get really wacky and my asset allocation deviates more than 5% from my target, then I would rebalance by selling some gainers and rebalance into weaker funds. Here’s more on rebalancing your portfolio.

7. Check target asset allocation

You also might want to check your asset allocation if you haven’t done so in over 5 years. I rarely change my target asset allocation because I like to stick with the plan. The last time I made a change was when I quit my engineering career. I became more risk averse and didn’t like investing 100% of our portfolio in stocks anymore. Now I have 20% in bond funds and that helps me sleep better. Read how to figure out your asset allocation to help figure it out.

8. Work and increase your social security benefit

The Social Security benefit is the last safety net for many retirees. You don’t want to be in that position, but what’s even worse is having no Social Security benefit at all. You need 40 Social Security credits to qualify for Social Security benefit. If you don’t have 40 credits yet, then you probably should put off retirement. The size of your Social Security benefit is a function of your highest 35 earning years so you need to have quite a few good years. If you have many zero or low earning years, then your social security benefit will be lower. Anyway, if you are going to need Social Security benefit, then you probably need to work a little longer to beef it up. See how early retirement will impact my Social Security benefit.

9. Keep lifestyle inflation under control

Lastly, you need to keep your lifestyle inflation under control. Normal people tend to spend more when they get a raise. Every year there are new gadgets and toys to buy. It’s tough to say no to buying things. That’s why the US retirement saving average is so dismal. However, you have to ask yourself what’s more important – new toys or financial security. If you don’t have a gadget already, you probably don’t need it. Financial security is much more important in the long term.

Thanksgiving is a time to reflect and give thanks for what we have. It’s also the time to finish the year on a good note and start planning for the next one. If you haven’t been able to follow these 9 ways to improve your retirement readiness in 2015, then you should make it a goal for 2016. Happy Thanksgiving!

Have you done well with your retirement readiness in 2015?

Image credit: by Captured Heart

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.

Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.

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{ 15 comments… add one }
  • Investment Hunting November 24, 2015, 10:37 am

    Great article. The first three are in my opinion critical to reaching the goal. I also like #8, many people think Social Security will be gone when we all retire, but until this happens, I think it’s important to strive to earn enough to receive the max benefit in retirement.

    Thanks for writing this post.

    • retirebyforty November 24, 2015, 9:43 pm

      I’m pretty sure Social Security will still be around by the time I’m 65. We should get a partial payment at least.

  • Ann Davis November 24, 2015, 6:23 am

    How does a Roth 401K account figure into the limits? Does it fall within the 401K limits or is it the same as a Roth IRA?

    • retirebyforty November 24, 2015, 9:43 pm

      The Roth 401k falls under the 401k limits. Check with your 401k plan administrator if you want to make sure. Good luck!

  • Adam @ AdamChudy.com November 23, 2015, 10:17 am

    End of year is always a good time to top off the accounts.

    One I might add is it’s a good time to reevaluate your mortgage payment schedule. If your income has increased or expenses gone down, it’s a good time to reconsider adding another $xx / month or adding an extra payment or two.

  • Tawcan November 23, 2015, 10:13 am

    #9 is probably the hardest to do for many people. With a growing baby, it’s definitely more challenging to avoid lifestyle inflation.

    Haven’t put too much thought into increase the social security benefit for myself. I see social security benefit as a safety net but certainly don’t include it in the retirement calculation.

    • retirebyforty November 23, 2015, 9:56 pm

      A baby is a lot of fun, but they can be expensive too. Don’t buy too much stuff for the kid. 🙂 They’d rather have your time than any toys. Enjoy!

  • Mike Drak November 23, 2015, 9:13 am

    A part of my retirement readiness plan is to find ways to contribute and give back. Helping others is the way to go for me.

    • retirebyforty November 23, 2015, 9:55 pm

      That’s great! A lot of people needs help with their retirement planning.

  • freebird November 23, 2015, 8:32 am

    On #9 my late father used to remind me that while it’s nice to get what we want, it’s better to learn how to appreciate what we have. Back in my youth I used to call that line of thinking a “cop out”, a lame excuse for failing to get ahead, but over the years I’m slowly realizing that the former doesn’t always lead to the latter, and how a never-ending quest for more things is a life that’s wasted.

    It’s ironic how the day after our celebration of reflection and gratitude begins our largest acquisition spree of the year. Stepping away at such point may be taken as a sacrifice for the future, but I think we have another more important reason not to participate. If instead we contemplate and open our eyes and hearts to what is plentiful around us, we may find that we can be happy with far less burden on our time.

    • retirebyforty November 23, 2015, 9:54 pm

      Life is good and we need to learn to appreciate what we have. Our lifestyle is better than 99% of the human population. You’ll never be satisfied if you can’t appreciate what you have. Thanks for your comment.

  • Ernie Zelinski November 23, 2015, 1:11 am

    Yes, I think I have done okay with my retirement readiness in 2015. Indeed, even though I am for all intents and purposes retired, my net worth should have increased by around $100,000 when I do the final count at the end of the year. I think that I have done pretty well given that I lived under the poverty line for several years and have worked for less than half of my adult life. What got me to where I am is respecting and following advice such as this:

    “People who don’t respect money don’t have any.”
    — J. Paul Getty

    “People who are foolish with money are foolish in many other ways too.”
    — Unknown wise person

    “The art of living easily as to money is to pitch your scale of living one degree below your means.”
    — Sir Henry Taylor

    “The saving man becomes the free man.”
    — Chinese proverb

    “The greatest secret to making money and being successful is helping other people make money and be successful.”
    — Deepak Chopra

    “Becoming wealthy is not a matter of how much you earn, who your parents are, or what you do . . . it is a matter of managing your money properly.”
    — Noel Whittaker

    “He who buys what he does not need steals from himself.”
    — Unknown wise person

    “It’s a serious character weakness to think you can get something of value for little or nothing, to believe that life will flood you with abundance when you won’t commit yourself to delivering your best contribution in exchange. In fact, it’s a safe bet that you’ll subconsciously sabotage yourself from being in such a place for long. You won’t allow yourself to receive what you don’t feel you’ve earned. To receive life’s bounty, you must know without a doubt that you deserve it.”
    — Steve Pavlina

    “The ownership of money and property comes as a result of doing things in a certain way. Those who do things in a certain way, whether on purpose or accidentally, get rich. Those who do not do things in this certain way, no matter how hard they work or how able they are, remain poor.”
    — from “The Science of Getting Rich”

    “Formal education will make you a living; self-education will make you a fortune.”
    — Jim Rohn

    “Always leave enough time in your life to do something that makes you happy, satisfied, even joyous. That has more of an effect on economic well-being than any other single factor.”
    — Paul Hawken

    “What we really want to do is what we are really meant to do. When we do what we are meant to do, money comes to us, doors open for us, we feel useful, and the work we do feels like play to us.”
    — Julia Cameron

    • retirebyforty November 23, 2015, 9:52 pm

      Great quotes, as usual. I need to do a final count soon too. I’m pretty sure our net worth increase would be less than $100,00 this year. The stock market has been very volatile. We’re up a decent amount so I’m happy with that.

  • Michael @ Financially Alert November 23, 2015, 1:06 am

    Great tips Joe! I’m going to max my wife and my Roth IRAs for 2015 in the next couple of weeks. What do you do when you max your Roths? Do you immediately drop the cash into an index fund, or do you slowly invest it over the following year in chunks? (Sometimes I’m hesitant to invest the entire lump sum at once, but I’ve also shot myself in the foot when I see the cash just sitting there a full year later.)

    • retirebyforty November 23, 2015, 9:49 pm

      I usually contribute to our Roth IRAs 2-4 times per year. We don’t have as much liquidity now so I can’t invest $11k at once. Investing the whole chunk at the beginning of the year works well too. Researches have shown that it is better to invest the whole amount.

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