It 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.
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
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.