The numbers don’t lie: Many Americans don’t feel confident about their retirement.
Only 18% of us are “very confident” that we’ll be able to live comfortably in retirement, according to the annual Retirement Confidence Survey by the Employee Benefit Research Institute.
Thankfully, just like there are methods to boost confidence in your career, you can also increase self-assuredness in your retirement plan. I’ve spent a decade helping individuals retire, and I can attest that although taking action might be initially intimidating, it will eventually help you gain confidence and control over your financial future.
Here are some smart ways to boost confidence in your retirement investment plan and improve its chances of success:
1. Utilize an employer contribution plan.
There is some good news that arose from the aforementioned survey, however. While only 60% of Americans felt some degree of confidence about their retirement, that number jumped 10% with workers who had an employer contribution plan, like a 401(k). These workers also reported feeling more confident about paying for expenses and covering medical costs in retirement.
All feelings of confidence aside, an employer contribution can be very financially beneficial. It will allow your wealth to grow tax-free, and when harnessed with compound interest, these plans can grow your nest egg rather quickly.
Additionally, if your employer offers a match (where they partially or fully match your contributions up to a certain amount), it can provide a tremendous value. I’ll typically tell my clients that this is essentially free money on the table, and to at least invest up to that amount.
2. Do a “stress test.”
Doctors often utilize stress tests – measuring a patient’s heart while they exercise — as a smart method to discover any potential vulnerability during more extreme scenarios. Although patients are initially reluctant to take the test, they’re often reassured when they get the results, or at least have an action plan to address any issues.
Similarly, a retirement stress test involves experiencing your current retirement investments under a variety of hypothetical market scenarios. If you have a well-diversified, long-term portfolio, this test can give you confidence knowing that although you’ll probably experience future drops, your investments will most likely eventually go up over the long term.
3. Then, alleviate any “stress test” symptoms.
Just like a stress test at a doctor’s, you can (and should) work to alleviate any “symptoms” that arise from a financial stress test.
For instance, if your nest egg isn’t where you want it to be in the hypothetical future, you can consider shifting your asset allocation more toward stocks, which tend to have greater returns over the long term.
Conversely, if you can’t stomach a potential drop in the future and would be too tempted to sell your stock investments, you may want to consider a small shift toward less-risky assets.
4. Create an emergency fund.
Here’s another alarming statistic: 63% of Americans don’t have enough saved to cover a $500 emergency, according to Bankrate.
You simply can’t have confidence in your retirement investment plan if it can get derailed by a broken transmission or sudden job loss. Even worse, if you need to withdraw from tax-advantaged accounts to cover these unexpected snafus, it can result in severe penalties from the IRS.
Look no further than an emergency fund — a way to sleep soundly every night knowing you have the bandwidth to cover unexpected expenses coming your way. This involves having six-to-eight months’ worth of living expenses (bare-bones only) stowed away. As much as it pains me to tell people to put wealth in savings accounts, an emergency fund is a smart and necessary step to boost your retirement confidence before investing.
5. Calculate how much you will need for retirement.
As I’ve stated before, relying on ballpark figures for retirement isn’t the wisest move. Sometimes, that number will fall short, while other times you’ll be over-estimating the amount.
Conversely, honing in on the specific nest egg you’ll need for retirement can help you gain confidence in your plan, ensure you have the right goals, and even motivate you to save more as well.
According to US News, people who calculate the exact number needed in retirement are more likely to save and invest more. Additionally, even if they had to save more, the results found that those who had calculated specifics were more confident in their ability to retire.
It might be initially intimidating, but by taking action steps now, you’ll be able to have assurance and control over your financial future.