3620: 6 Habits of Above Average Retirement Savers by Craig Stephens of Retire Before Dad on Retirement Savings

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[00:01:00] This is Optimal Finance Daily. Six Habits of Above Average Retirement Savers by Craig Stevens of RetireBeforeDad.com. The average balance for retirement accounts is about $100,000, according to Fidelity. That's low considering retirees may need their money to last 30 or more years past their retirement date.

[00:01:24] Retirement account balances certainly rise as years in the workforce increase, but other habits can help you achieve above average results. The earlier these retirement savings habits are implemented, the more likely it is that your portfolio can grow to levels that support your goals. Here are six habits practiced by successful retirement savers to incorporate into your comprehensive plan.

[00:01:50] Number one, consistently save in tax-advantaged accounts. Among the most important savings habits is consistency. Savers who invest regularly and avoid withdrawals tend to have higher account balances. Tax-advantaged accounts are the best vehicles for optimizing savings. Make it a habit to always save for retirement first.

[00:02:15] Put your savings on autopilot with your broker and keep investing through bull and bear markets. 401ks and other defined contribution plans are an easy way to implement this habit because they're automated for you before you receive your paycheck. When you start a new job with a 401k, enroll in the plan on day one. Contribute as much as your monthly budget allows, but aim for the contribution maximum if you can.

[00:02:44] Contribute at least the minimum amount required to receive the company match, if available. If you're eligible for a Roth IRA, make sure to invest the maximum every year on top of your 401k. Maxing out your 401k and Roth IRA for just five years will put your account balances over the $100,000 mark. Number two, strive to earn more.

[00:03:11] It should come as no surprise that high earners are often above average retirement savers. When there's more money, it's easier to save. But not all high earners are good at saving. In fact, many are inept. But a recent study by Vanguard found that workers who earned $100,000 or more had account balances that averaged $237,061. That's more than double the average of all savers.

[00:03:40] Healthy salary growth from a successful corporate or professional career can make it more comfortable to max out a 401k. Any excess cash can then be saved in other tax-advantaged accounts, such as a Roth IRA, or be invested in taxable brokerage accounts or real estate. As your salary increases during your working years, so does your retirement security, as long as you consistently save and invest.

[00:04:07] Number three, remain loyal to your employer. The same Vanguard report indicates that defined contribution plan participants who stayed with the same employer for 10 years or more had an average account balance of $188,744. 10 years is sufficient time for contributions and market returns to compound into significant savings. Longer employment periods also suggest higher salaries.

[00:04:35] Though employer loyalty tends to help retirement savings, it can also be costly. If you're stuck in a job with no promotion opportunities, you may be better off finding a new employer. When switching jobs, retirement savings is often neglected, so always consider the implications of a new job on your retirement nest egg.

[00:04:57] Make sure to roll over balances from your old plan to an IRA and enroll in your new employer's plan on the first day. Use any salary increase to bump up your contribution percentage. Number four, think long-term. Successful retirement savers have an eye on the future and are less inclined to splurge on short-term pleasures and shiny objects.

[00:05:22] Workers who max out their 401ks in lieu of luxury cars and frequent expensive dinners know that their sacrifice today will pay off many times years later. Saving enough for retirement requires a long-term plan, but also short-to-midterm action items along the way. Losing sight of the end goal by thinking short-term can lead to a saving shortfall. Number five, ignore market fluctuations.

[00:05:52] Financial advisors recommend an annual retirement account checkup to make sure allocations are aligned with retirement goals. Aside from an annual adjustment, above-average retirement savers mostly ignore their account balance and daily market fluctuations. Trying to time the market is a losing strategy, especially for a typical worker with limited investing experience. If tempted by market timing, do so in your non-retirement accounts.

[00:06:21] Don't put your retirement money at risk. The best strategy for most everyone is to contribute to accounts regularly and keep your hands off. The more emotion involved, the more likely you are to make a mistake. And number six, avoid excessive fees. Index funds and ETFs have consistently outperformed most managed mutual funds over long periods of time.

[00:06:47] Managed mutual funds often carry larger fees, which detract from returns. Fund managers are challenged to consistently beat indexes year after year and often fail. Investing in broad index funds quickly diversifies your portfolio among many investments, spreading risk while participating in long-term market gains. When choosing an IRA for your retirement savings, make sure you have access to a wide variety of funds,

[00:07:16] including various index funds and ETFs. If your 401k lacks low-cost index fund options, contact your human resources department to request more variety. Implement these six habits of above-average retirement savers as early as possible to maximize your wealth and retirement security. You just listened to the post titled,

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[00:09:58] That's 50% off your first year at Monarch.com with code OPTIMAL. I thought this article was spot on, and I can attest to the effectiveness of these habits since I implemented all of them myself. I find ignoring market fluctuations especially useful. Remember this, you don't lose money until you sell. What you're seeing when you review the performance of your investments are unrealized losses.

[00:10:28] Just like when you see your portfolio going up, those are unrealized gains until you sell. The message here is that you didn't lose money. Just hold on and stay the course. My friend Jeremy Schneider over at Personal Finance Club did a great post on this very subject where he showed a chart of the largest intra-year drops of the S&P 500 over 40 years.

[00:10:52] The average drop for each year over the last 40 years is 12%. Note that this doesn't mean that the market ended the year down that much. For example, in 2020, we experienced a 34% intra-year drop, but the market recovered and ended up over 16%.

[00:11:13] Despite the average intra-year drop being 12% over the last 40 years, the annualized return over that time period is a positive 11.5%. So anyone who held on over this time period, continued to invest, and didn't sell, did just fine growing their wealth. Now what if you're already retired and you're actively drawing down from your portfolio?

[00:11:38] Your asset allocation and drawdown strategy should already be optimized to handle expected market corrections and crashes. We don't know when these corrections will happen, but we do know that they will at some point. So the key is to expect them and strategize accordingly. And that's a wrap for another Monday show. Have a great start to your week, and I'll be back tomorrow where optimal life awaits.