A new year brings a fresh start, but it is also a time for reflection. Looking back on what did and didn't happen last year can help you set better goals for 2023. This is true of many aspects of your life, including your retirement planning.
You may be decades away from leaving the workforce, but it's important to review your savings strategy at least annually to stay on track. If you haven't already done so, take a few minutes to do the three steps below.
1. Review Your Retirement Planning
Ask yourself whether any of your plans for retirement have changed over the past year. For example, you may have changed your mind about where you want to retire or a health condition may have developed that may force you to retire earlier than expected. These things may require you to go back to the drawing board and reconsider how much you need to save for retirement.
Also, see how much you were able to save for retirement during the last year and your current account balance. If you're saving more than your goal, you may be able to retire earlier than planned. If you haven't saved as much as you expected, you may need to increase your retirement contributions in 2023 or delay retirement to give yourself extra time to save.
Make whatever changes you feel are necessary to keep moving toward the future you want. Do not postpone small problems for later. It's much easier to keep yourself on track if you make small adjustments annually rather than waiting until you're on the brink of retirement.
2. Decide where you will invest your money in 2023
The types of retirement accounts you use determine how much you can put aside in 2023, whether you'll get any help from an employer, what investments you can make, and what kind of tax breaks you'll get. It is important to weigh all your options and come up with a plan that will maximize the growth of your money.
If you have access to an employer-sponsored retirement account that offers a match, it's usually the best place to put your savings, at least initially. Once you claim the entire match, you can decide whether to continue saving in that account or switch to a different type.
An IRA is always an option if you have earned income during the year or are married to someone who does. If you go with an IRA, you'll have a lot of freedom to invest how you want and even choose whether to pay taxes on your funds now or in retirement.
Don't overlook non-traditional retirement savings accounts, such as Health Savings Accounts (HSAs), or taxable brokerage accounts. HSAs can be a great place to put money for retirement healthcare expenses because money spent for medical care is tax-free. But you'll need a high-deductible health insurance plan to contribute to one.
Taxable brokerage accounts don't offer the same tax breaks as retirement accounts, but they don't have restrictions on how much you can save in a year or what you can invest in. You can withdraw your money whenever you want, as well, unlike retirement accounts, which typically impose a 10% early withdrawal penalty if you're under age 59 1/2.
Once you settle on a retirement savings strategy, start putting it into practice. See if you can set up automatic retirement contributions so you don't have to remember to make them manually. Then, set a date on your calendar for your next retirement check-in about six months to a year from now.
3. Review Your Investments
In addition to looking at how much you're saving and how much you think you'll need, take a look at how you're investing your money. No matter your age, you want to diversify your funds among several investments so that no one weighs too much on your portfolio. But your asset allocation will not remain the same over time.
Young adults typically invest most of their money in stocks. These can be volatile in the short term but offer higher earning potential than bonds. Losing money in the near term doesn't matter much at this stage as there is plenty of time for the stocks to bounce back before you have to withdraw your funds.
But as you age, consider moving more of your savings into fixed-income investments to protect your nest egg. They might not earn that much every year, but you won't have to worry much about significant losses on the eve of retirement.
You can change your asset allocation yourself over time or use a target-date fund if you prefer to be more hands-off. These types of funds automatically adjust their assets over time to become more conservative as your chosen retirement year approaches.
Now is also a good time to consider dumping any investments that are no longer suitable. This doesn't mean getting rid of a stock just because it had a bad quarter. Even the top performing stocks have their ups and downs. Instead, focus on what you think the company's long-term growth potential is. If you don't think it has a bright future, it may be time to sell and invest in something new.
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