5 Steps to Maximize and Manage Your Retirement Savings

Maximize and Manage Your Retirement Savings

There are a few common mistakes that many people make when managing their retirement plans. They either don’t put enough toward retirement and leave money on the table (by not taking advantage of matching contributions), or their savings get eaten up by expenses and fees.

Adding to the problem can be issues like holding on to the wrong asset allocation or failing to diversify (or diversify enough). Too many savers and investors ignore the fact that their portfolio needs to reflect individual age, retirement, and risk needs.

If you’re younger, you can get away with a more risky, aggressive asset allocation, because you have several years to make up for any losses. Those that are closer to retirement need to scale back on the risk in order to keep what they currently have for retirement.

And if you don’t pay attention to the funds you’re buying, you could experience an overlap in investments. Some funds have the same holdings or objectives, which means your returns are going to be average.

You don’t want to be making any of these mistakes when it comes to planning for retirement. And you can avoid them with our tips on how to maximize and manage your wealth.

5 Steps to Maximize and Manage Your Retirement Savings

Generally, maximizing your retirement savings can be boiled down to simply understanding what your choices are and choosing investments according to your goals and circumstances.

Unfortunately, many people hesitate to dig deep into their options when it comes to retirement plans, and as a result, their earnings suffer.

Let’s help you avoid that and make sure your retirement plan is on the right track with these 5 steps:

Step One: Locate and Organize Your Retirement Plan Investment Options

Investment options within retirement plans can vary. Some plans offer 6 to 10 investment choices, while others offer thousands of investment choices.

Look into the choices that are available to you, and evaluate how well they work with your retirement goals, risk profile, and outside investments.

Don’t be afraid to ask your employer for help, especially if you have a plan with numerous choices to pick from. It can be overwhelming to look at first — but you don’t want to potentially be losing out on thousands of dollars a year, right?

Educate yourself, ask for help, and put the work in. It’ll be worth the effort.

(And if you’re self-employed, don’t be afraid to ask for help from a financial pro that’s willing to work as your fiduciary. This applies even if you’re employed and have someone at work to help you. Don’t hesitate to seek out third-party advice.)

Note – if your retirement plan uses mutual funds, track down the ticker symbols for each investment option. You’ll need it later!

Step Two: Review Retirement Goals

Think about what retirement will look like for you. There is no one right or wrong answer here, but your answer will help you to determine how much money you”ll need. This will largely be based upon your age and when you want to retire.

Your age is an important factor because time will be on your side if you’re younger (and against you if you’re older) due to the power of compound interest.

That doesn’t mean you need to immediately panic if you’re starting a little later. Know that getting your plan settled now will help you make up for any losses/lack of savings in your past.

Besides that, think about what you want from retirement. Do you want to travel around a lot, play golf year-round, or have the freedom to dine out every night? You’ll want to account for these expenses so you have an accurate idea of how much money you’ll need in retirement.

Try drawing up a mock budget for your ideal retirement. This exercise can help you get a better idea of what you’ll spend if you do everything you want to once retired. You can then get another estimate of how much you’ll need because you’ll have a detailed guess at what you plan to spend.

Step Three: Asset Allocation and Risk Profile

Your risk profile is one of the primary foundations for determining how to allocate and manage your retirement plan option. You may want to to speak with a trusted financial professional to help you evaluate your risk level and determine the portfolio strategy that is appropriate for your investments.

This strategy can then be used to create an investment allocation that matches your profile and retirement goals.

As a very general rule of thumb, if you’re younger you can afford to invest with more risk in mind. You have years to make up for any losses. If you’re older, you’ll want to scale back on the risk and invest more conservatively. You don’t want to face losses so close to retirement.

Step Four: Objectively Analyze Investment Options and Fees

Yahoo, in partnership with Morningstar data, has an outstanding fund analyzer that allows you to research the fees and expenses of your investments. The great part about the site is that, in addition to information pertaining to your funds, it also contains the category average for your investment. This lets you evaluate the strengths and trouble spots for your investment options.

To navigate the site, simply enter the ticker symbol in the box on the right side of the screen that says, “get profile for.” Once you’re on the fund profile page, you can also use the site to research past performance, holdings, risk, and purchase information.

Let’s discuss what you should focus on to research and analyze your investments:

Profile: This determines where the fund falls in the “Morningstar Style Box,” and will help you to determine how the fund fits into your asset allocation. You can also review the fees and expenses of the fund. (Aim for lower!).

You also want to avoid paying commissions. Look out for 12b-1 fees, front end sales load, deferred sales load.

You should make a point to review the “annual holdings turnover.” Remember, buy and hold is the name of the investing game. A low turnover ratio is goo  and can be an indicator of lower expenses. The exception to that rule is small and international investments, as they typically have high turnover.

Risk: The following statistics are of importance here:

  • Alpha is the measure of risk adjusted performance – positive is good.
  • Beta is the risk in relation to the market; usually in relation to the S&P 500.
  • R-squared is the percentage of an investment’s movements that are explained by movements in the index.

Performance: A great way to determine if you can handle the risk of a fund is to review the Best/Worst 1-year and 3-year returns. This is what we describe as true gut check.

You can also review the “annual total return (%) history” to see how the fund has performed in the past, compared to the category average.

Step Five: Check Beneficiaries

It is very important that you review the beneficiaries that you designated on your retirement plan, as it will protect your loved ones should something happen to you. There are huge tax advantages to having your assets pass through beneficiary designation as opposed to your Will.

(Speak with a trusted CPA for more information on tax advantages and why they matter.)

You should name contingent beneficiaries as well. To ensure that all branches of your family receive their share of assets, you can add “per stirpes” to your beneficiary designations. This means that, in the event one of your children passes away before you, your grandchildren will inherit what you originally intended for your child.

If anything has changed in your life since you first became employed at your company, you should definitely double-check your beneficiaries.

Stuck In a Bad Plan?

Did you go through these 5 steps and realize your retirement plan wasn’t making the best use of your contributions to maximize your wealth? You should bring your discovery to your employers attention.

The Employee Retirement Income Security Act (ERISA) was put in place to protect employees. From the site:

The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.

If your employer is not taking their fiduciary responsibility seriously, ERISA will hold them accountable.

Make it a point to go through these 5 steps some time this month. You might be surprised at what you find – maybe fees and expenses are seriously eroding your ability to get ahead, or maybe the investments you chose are performing poorly.

In any case, it’s important to stay on top of your retirement fund so you can get the most out of it.

Are you making the most of your retirement savings? Do you feel your current retirement plan is being managed properly?

Black Friday and Bad Fees

Black Friday Shopping

With Halloween in the rear-view mirror and the cold weather setting in, the holiday season is officially here. You can’t get by this time of year without discussing Black Friday, but Brian and Bo are adding in another topic up for discussion today — fees.

We’re Done with Fees!

Brian’s taking a stand on the absurd amount of fees that we all encounter in our daily routines. From ATM fees, to the fees we get charged when upgrading our phones, to foreign transaction fees… isn’t it time we stop paying for them?

The guys think so, and cover a few ways to avoid paying the worst of bad fees:

  • What banks give you access to millions of ATMs, so you don’t have to worry about fees when withdrawing your money.
  • What cards don’t have foreign transaction fees associated with them.
  • How to sweet talk customer service agents on the phone into dropping fees they shouldn’t charge in the first place.

After the guys talk fees, they shift their focus to getting the most you can out of Black Friday deals.

Making the Most Out of Black Friday

Wait — what’s a tightwad doing talking about spending money for the holidays? Don’t worry, Tightwad Nation. The guys discuss this retail “holiday” as an opportunity to buy things you actually need and at a much lower cost than any other time of the year.

In order to have a successful Black Friday, you must have a game plan. Take inventory of what you need and create a shopping list to take with you. Brian suggests using the TGI Black Friday app to keep track of items and deals you want to score on.

Additionally, the guys recommend using Ebates or Upromise to save even more on top of those Black Friday deals.

You should also look to shop at certain stores that offer discount cards (like Target using their REDcard for 5% off), or take advantage of the credit cards that offer quarterly bonuses if you shop at certain stores.

Another tip to make the most of the money you plan to spend is to shop through your credit card company’s website. There’s usually a shopping portal you can go to, and they’ll offer cash back as well.

Challenge yourself to stretch your dollar as far as it will go this holiday season, and listen in for more tips on how to save.

The Difference Between Good Debt and Bad Debt

Good Debt and Bad Debt

Debt is often shunned by most financial professionals, and for good reason. Many people go into debt for the wrong reasons, and end up spending more money in interest than they would have if they had just paid in cash.

However, that doesn’t mean that all debt is bad for your financial situation. Debt can be leveraged to build wealth when used correctly. Used poorly, and it can set you back quite a bit.

There’s a difference between good debt and bad debt — and it’s important to understand what that difference is.

How Debt Can Help You Build Wealth

Let’s start off with how you can use your debt as a wealth building tool.

Good debt means investing in things that create ongoing value for you. The focus should be on purchasing an appreciating asset (such as a home), or purchasing something that will generate income (a rental property).

In both of these examples, you’re getting something in return for your investment. Other examples of good debt include:

  • A mortgage for your home
  • Student loan
  • Business loan
  • Charges on credit that are paid off monthly
  • Residential rental property
  • Commercial real estate

All of these examples come with the potential for generating income down the road.

There is also something to be said for having a good banker when it comes to taking out a loan. We once read a great statement about debt and bankers: borrowing money from a banker is one of the few business examples where you come up with 10% of the money for the venture, and yet the bank allows you to have 100% control and 100% of the profit less interest.

That’s not a bad deal!

How Debt Can Wreak Havoc on Your Finances When Used Poorly

Debt can become troubling when it is not used to build wealth. Unlike those who leverage debt to buy assets and generate additional income, you’re not getting anything in return for your “investment” by making purchases you can’t afford on depreciating assets.

Here some examples of bad debt:

  • A luxury car that you wouldn’t have been able to pay for without debt
  • Designer handbags or expensive watches
  • Clothing/shoes/accessories
  • Lavish vacations
  • Going overboard on gift-giving during the holidays

Would you really call any of these an investment in your future wealth? No. All of these examples share the common theme of buying material goods to make yourself look wealthier than you actually are.

Except you’re doing the exact opposite. Unless you can afford these items, each of these purchases is taking you further away from wealth. Faking wealth at the expense of your financial future is a bad idea.

Remember, looking rich and being wealthy are two different things.

Doubtful that debt and consumerism are actually a problem? Have a look at these statistics, which are from September 2014:

U.S. household consumer debt profile –

  • Average credit card debt: $15,607
  • Average mortgage debt: $153,500
  • Average student loan debt: $32,656

In total, American consumers owe –

  • $11.63 trillion in debt (increase of 3.8% from last year)
  • $880.5 billion in credit card debt
  • $8.07 trillion in mortgages
  • $1,120.3 billion in student loans (increase of 11.5% from last year)

These are all hefty figures, and a prime example of how we’re throwing money down the drain, as most things purchased today will depreciate in the future. (New cars lose 11% of their value once you drive them off the lot!)

Wouldn’t you rather focus on appreciating assets that will be worth more than what you purchased them for?

Bottom Line: Debt Is Debt

Debt can be a great tool when used responsibly, but it often takes discipline and understanding of your financial situation to use it to build wealth. A good rule of thumb to keep in mind is that you should keep your debt to under 35% of your gross income, so long as you are putting 15%-20% of your gross earnings toward savings and retirement.

Don’t be tempted to finance things you can’t afford right now; save up for them instead, and focus on your future. Though there is good debt and bad debt, at the end of the day, debt is debt. Take it on with caution and try to limit borrowing money to situations where you’re leveraging it to acquire appreciating assets.

How to Prioritize Financial Goals

Here's how to prioritize your financial goals

The guys got a great listener question a few months ago — from a husband and wife team who listen to the podcast together! — and are taking it on for this episode.

The question: how much should you save and invest if you have debt?

This is a good one to cover, because it’s difficult for most people to get through life without taking on any debt at all. Most of us don’t have over a hundred thousand dollars lying around in cash to put down on a home, or that same amount again to pay for higher education costs.

So we take out mortgages and student loans. (Or we just don’t yet have good money management habits and end up overspending on the credit card.)

Whether it’s good debt or bad debt, chances are you’ve had a little bit of it — which means you’ve had to juggle multiple financial goals, too.

We need to save and invest wisely for retirement, establish an emergency fund, repay debts (be it consumer credit card debt or a car loan or a mortgage),and more.

The Basics of How to Prioritize Financial Goals

Brian and Bo go over some of the basics that we can all abide by when it comes to prioritizing financial goals:

  • Pay yourself first: That means taking care of your retirement needs first. You need to be able to take care of yourself financially (now and in the future), so this should almost always be at the top of your priority list.
  • Have an emergency fund: Again, this goes back to taking care of yourself. That emergency fund will help safeguard you against unexpected expenses that could push you into debt.
  • Get rid of debt: Once you’ve secured your savings, it’s time to look at aggressively paying down any debts you may have.

The exception to this order? When you have high-interest rate debt. Usually associated with credit cards, debts with interest rates over 8% or so are your financial emergency, and need to be addressed immediately. That doesn’t mean sacrifice savings entirely — but it does mean making room in your budget to pay down debt.

Ideally, you’ll be saving 15% to 20% of your gross income for your retirement. But that may change depending on your debt situation. Again, it all depends on that interest rate.

Avoiding Money Wasters

Prioritizing your goals will get a lot easier if you can avoid some financial pitfalls that many Americans succumb to. The guys took a look at a list republished by J. Money at Budgets Are Sexy to see what average people wasted the most money on.

One of the biggies was no surprise: credit card debt. This is a huge waste of your hard-earned money and a great reminder of the importance to live within your means and avoid spending more than you can truly afford.

Others that Brian and Bo point out are deal websites (with a great quote from another financial blogger, Frugalwoods) and fees (along with a tip on getting out of them from time to time).