Top Tips

Answer: There are four basic concepts that come to mind. Here they are with details.

1. Start Early

The more time you have to accumulate wealth the better. If you start small and gradually increase your contributions over time, your nest egg in the future will likely be greater. Albert Einstein said the eighth wonder of the world is the power of compounding interest. For example: A 22-year-old who starts saving $5,000 a year and earns 6% annually on his/her investments could accumulate over $1 million by the time he/she is sixty-five. That’s nearly double what one would earn if they delayed and started saving at age 32. It’s math, not magic. The sooner you start, the better you will feel about your future retirement lifestyle.

2. Stay the Course 

During periods of extreme volatility, it's natural to want to pull out of the market and seek shelter in the safety of cash. Over the past fifteen years, we’ve endured two significant bear markets, testing even the sturdiest investors. Having an emotional reaction during these times of stress tends to do more harm than good. Timing the market is notoriously difficult. Over the past twenty years, if you tried to time the market and missed just the ten best performance days (which are usually clustered around the worst performance days), your return drops by 4.1%. And, if you missed the twenty best days in the market, your return drops by 6.7%. As you can see, staying the course is a much better strategy that typically leads to a better retirement outcome. At a minimum, assuming you’re investing systematically throughout the year when the market is down, you are opportunistically adding additional investments at a better price.

3. Age-Appropriate Allocations

Matching proper asset allocation with risk tolerance and time horizon is essential. While the financial media often discusses asset allocation in terms of the traditional 60% stocks/40% bonds portfolio mix, investors should always take their age into consideration (among other things) when deciding the appropriate asset allocation mix. Those who are starting out early and have multiple decades to retirement generally have more tolerance for risk and therefore should be more heavily weighted to growth assets, such as equities, as they typically provide larger returns for investors over long-term periods. But, as investors get closer to retirement, it is generally prudent to dial back portfolio risk and have a greater allocation to conservative investments. Market downturns are painful for investors regardless of their age or asset allocation mix. However, for investors who stay the course with their strategy, the good news is that equities move past bear market territory. 

4. Tax-Deferral Benefits 

Tax deferral is a powerful financial tool that can help investors compound their wealth over time. Setting aside part of your income in a retirement plan will not only lower your current tax obligation but it will also help save on taxes over the long run because 401(k) investments are able to grow tax-free. First, because you don’t pay taxes on your initial contributions, you get the full benefit of your contribution from the start. Second, you don’t pay taxes on interest or dividends received or capital gains incurred as long as your investments remain in your retirement plan. The reduced tax burden enhances compounding. And when you withdraw funds at retirement, you will pay taxes, hopefully at a lower rate. 

It’s hard to believe that 401(k) plans have only been around for just over 40 years. The legislation creating tax-deferred retirement plans has allowed U.S. households to accumulate significant retirement nest eggs. At the end of 2022, these plans topped nearly $9 trillion in assets according to the Investment Company Institute’s Fact Book. As longevity increases, many of today’s retirees are expected to reach their 90th birthday and beyond. Make sure you’ve started saving and investing now to get the most out of your retirement years. Stay focused and plan accordingly.