3 smart retirement moves you can make at any time, no matter how old you are
The best time to start is right now.
Retirement should be an exciting time. After all, you've worked for decades, and now it's time to sit back, relax, and do whatever your heart desires. To be able to do this, though, you need to make sure your finances are in order.
Regardless of how far out from retirement you are, it's never too late to begin taking steps to set yourself up for financial success. Here are some solid retirement moves you can make.
As a rule of thumb, you want your investments to become less risky as you near retirement because there's less time to rebound from market declines that could drop your portfolio's value significantly.
Reallocate your 401(k) holdings
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If your 401(k) contributions are going into a target-date fund, the fund automatically adjusts to become more conservative as you near retirement, but target-date funds are generally expensive to own relative to index funds. You can achieve a low-cost, well-rounded 401(k) portfolio with four index funds: Large-cap, mid-cap, small-cap, and international. If you're in your 30s with decades until retirement, your allocations may be:
- Large-cap: 60%
- Mid-cap: 10%
- Small-cap: 10%
- International: 20%
However, if you're in your 50s and retirement is around the corner, your allocations may be:
- Large-cap: 75%
- Mid-cap: 5%
- Small-cap: 5%
- International: 15%
What's important is that you adjust your allocations to fit your risk tolerance, while considering how harmful too much risk too close to retirement can be for your portfolio.
Open a secondary retirement account
If you haven't already, you should open either a Roth IRA or traditional IRA to supplement your retirement income. IRAs work like brokerage accounts because you can buy any stock you want, but they come with much better tax breaks. With a Roth IRA, you contribute after-tax money and can take tax-free withdrawals in retirement. With a traditional IRA, there's a chance that your contributions are tax-deductible, depending on your filing status, income, and whether or not you're covered by a retirement plan at work.
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You should also consider opening a health savings account (HSA). As people age, the need for medical attention often increases, and that's where HSAs come into play. An HSA allows you to set pre-tax money aside to pay for eligible medical, dental, and vision expenses for you, your spouse, and your dependents. If you're going to be spending money on medical expenses -- which you likely will -- you might as well set aside pre-tax money to lower your taxable income and tax bill.
Dividends are a way for companies to incentivize investors to hold their stocks, and with a sizable enough position in them, they can be a great supplement to your retirement income. Take the Invesco S&P 500 High Dividend Low Volatility Portfolio ETF(NYSEMKT: SPHD), for example, which has a 3.86% dividend yield. If you manage to accumulate $100,000 in the fund with that dividend yield, you can expect just over $3,500 annually in payouts when you account for the fund's 0.30% expense ratio.
The earlier you begin investing in dividend-paying stocks, the easier it is to accumulate a sizable position. If you have 10 years until retirement and decide to invest $1,000 monthly into the Invesco S&P 500 High Dividend Low Volatility Portfolio ETF, receiving 8% annual returns and reinvesting the dividends into the fund, you would have accumulated over $200,000 in that time. That's more than $7,100 in yearly dividend payouts.
Dividend income will likely not be your primary source of retirement income, but it can be a great addition to other sources, such as a 401(k), IRA, and Social Security. And in retirement, every little bit helps.
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