5 key steps to building wealth
These five simple rules will help keep your retirement savings on track and growing for the long haul — and that means a Future You who’s financially secure. Who doesn’t like the sound of that?
Automate your savings
Life is busy. Maybe you noticed? That means you need to make sure you’re contributing to your retirement account automatically. Because you know that any “must. do. this. now.” task that suddenly stares you in the face — paying your credit card bill, watching that puppy video — is going to feel much more important in the moment than “saving money for some future date decades away.”
You want your money quietly working for you in the background, no matter what’s happening in your life or in the world. That’s where automatic savings comes in. And hey, you’ve already nailed this with your 401(k). (Paycheck deductions, anyone?)
With a little work upfront, you can mimic that process with your IRA: Link your bank account to your IRA account and set up regularly scheduled transfers. (Some companies let employees automatically send money to their IRA from each paycheck. Ask your employer if that’s a perk at your workplace.)
An added benefit to auto-saving plans is that you get to think less about your retirement account. Why is ignoring your account a good thing, you ask? Because when the market’s tanking and your account balance is trending down, you don’t want your hands anywhere near the “sell” button. Investing in stocks means riding out the tough times — and putting your savings on autopilot can make that easier. Incidentally, stock market crashes are a great time to distract yourself with a puppy video or two.
2. Revisit your savings once a year
As we’ve been saying, when you’re investing for a date far into the future, it’s absolutely fine to let your money just sit there, quietly enjoying the highs (and surviving the lows) of the financial markets.
But it’s also true that you probably shouldn’t ignore your account entirely.
Here’s why: Thanks to the market’s gains and losses, your original asset allocation — how you divvied up your money among different types of stocks and bonds — will shift, and eventually get out of whack.
For example, say that when you opened your account, you decided to invest 70% in stocks and 30% in bonds. If the stock market has since increased in value, the proportion of your stock investments is going to grow; now maybe 80% of your holdings are in stocks.
Since bonds are a more conservative investment than stocks — they have less potential for growth, and less potential to plunge in value — your investment account would be riskier now compared with when you first created your retirement portfolio. If there were a stock market crash and your portfolio was 80% in stocks, rather than the 70% you’d originally chosen, you’d be in for an unpleasant surprise.
To reduce that risk, you need to rebalance, which means getting your investments back to the percentages you chose originally. (Now, if you’re investing in a target-date fund, you don’t need to rebalance — the fund manager will do it for you. And the same goes for many robo-advisors, which automatically rebalance your portfolio. That’s one of the perks.)
5. Stick with the market
With a goal like retirement, the stock market is your friend. That’s not to say it can’t be scary. It can be positively petrifying when the market tanks. And it will tank — it always does. But it always goes back up, too.
If you’re investing in a diversified portfolio — and of course you are! — then you’re investing in thousands of companies in the U.S. and abroad. To avoid the market is akin to saying: I think most companies worldwide are going to fail.
Rationally, we can agree that while many businesses do fail, many others thrive, and new companies are constantly emerging. Witness how 40 years of stock market investing can pay off, compared with leaving your money in a savings account or — gasp — under the bed:
One way to rebalance is to temporarily change how you’re investing — for example, if your allocation to stocks has become too heavy, direct a larger portion of new account contributions to bonds for a bit. Slowly, as you invest more money, you’ll shift the percentages you’ve invested in each asset class back to where you wanted them.
3. Hike your savings rate
Did we mention that it’s awesome that you’re saving for retirement? It’s awesome. And you’ve already done the hardest part: getting started. The next step is easy: Hike up your savings rate a little bit every year.
It’s easy because you can do it if and when your income rises. Say you get a raise or a bonus or some unexpected found money. Why not send just a little bit of that out to your future self? And if the year isn’t great financially, you can always choose not to do it.
4. Avoid high fees
The same way that saving just a tiny bit more every year can push your retirement savings to lofty heights, seemingly small fees can have the opposite effect, taking a huge bite out of your account over your lifetime — you could lose more than $200,000 to fees in your 401(k) alone, according to a NerdWallet study.