3 Small Moves that Can Make a Big Difference in Retirement

Saving for retirement doesn’t happen overnight. It’s an ongoing process that requires monitoring and tweaking your plan over many years to help ensure you have enough to meet your retirement goals.

Sometimes relatively small adjustments to your plan can make a huge impact on your ability to save, such as choosing to invest in lower-cost index funds or increasing retirement savings by just 1% per year. Here’s a closer look at three savings-boosting strategies you could consider implementing.

1. Make a Minor Increase to Your Savings Rate

Boosting retirement savings doesn’t require major shifts in your contributions. In fact, small increases can have a big impact.

For example, let’s assume you receive a starting salary of $75,000 with a 3% raise every year. Your monthly contribution is 6% of your income with a 7% annual investment return. After one year, your balance would be around $8,225. But increasing your contribution by just one percentage point to 7% a month could boost your savings to $9,004 in the same year.

What’s more, many employers will allow you to automate your savings and divert a percentage of each paycheck to your retirement account. This can allow you to auto-escalate your savings, increasing your contribution rate by 1% each year or every time you receive a raise. These small increases can add up over time.

2. Extend Your Retirement Date

The longer you hold off on retiring, the more time you will have to save and take advantage of compounding returns. But you don’t need to push your retirement back much to gain significant benefits.

A study by the National Bureau of Economic Research found that a 66-year-old who works one additional year before retiring and drawing Social Security benefits could increase their retirement income by 7.75%.¹ Researchers also found that delaying retirement by three to six months has the same financial impact on retirement income as having contributed an additional percentage point of their salary to their retirement accounts for 30 years.

Let’s say you have $1,000,000 in your 401(k) and max out your contributions at $1,875 every month. At a 7% annual return rate compounding annually, you would gain an additional $92,500 after one more year of work and $191,475 after two years.

3. Consider Low-Cost Index Funds

Because index funds generally use a passive investing strategy, they may be able to save costs. For example, managers of an index fund are not actively picking securities, so they do not need the services of research analysts and others that help pick securities. This reduction in the cost of fund management could mean lower overall costs to shareholders. However, keep in mind that not all index funds have lower costs than actively managed funds. Always be sure you understand the actual cost of any fund before investing.

The expense ratio, or operating costs of a fund, typically ranges from about 0.5% to 1% for actively managed mutual funds and about 0.2% to 0.5% for index funds. While these fees may seem small, they can potentially take a big bite out of your savings in the long run, compounding along with your investment returns.

For example, say you invested $100,000 in a fund with a 7% return rate, and you contribute $1,875 every month. At an expense ratio of 1%, you will pay about $219,260 in fees over 30 years. That number goes down to about $60,325 in fees at an expense ratio of 0.25%.

Planning for retirement doesn’t have to be all or nothing. Small changes can make a big difference. Work closely with your financial advisor to understand whether there are adjustments you can make to your plan that could help you maximize your savings in the future.

Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds. The prospectus contains this and other information about mutual funds. The prospectus is available from our office or from the fund company and should be read carefully.

Any opinions are those of SSG Executive Advisory Group and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Although Passive Funds are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the funds may not be able to exactly replicate the performance of the indexes because of fund expenses and other factors. These are hypothetical illustrations and are not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions.

¹ National Bureau of Economic Research, “Working Longer Can Sharply Raise Retirement Income,” 2018.

Sources:
https://www.nber.org/system/files/working_papers/w24226/w24226.pdf
https://www.nber.org/digest/may18/working-longer-can-sharply-raise-retirement-income
https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
https://www.ebri.org/content/the-expected-impact-of-automatic-escalation-of-401(k)-contributions-on-retirement-income-3844
https://www.ici.org/system/files/2022-03/per28-02_2.pdf
https://www.nerdwallet.com/article/investing/mutual-fund-calculator
https://www.sec.gov/investor/alerts/ib_fees_expenses.pdf