McLean’s Director of Retirement Research, Wade Pfau, was recently interviewed by Vanguard about the most important steps for saving for retirement. Below is an excerpt from the interview.
Having enough income to last throughout retirement is likely one of your most important financial goals. Retirement experts Colleen Jaconetti from Vanguard Investment Strategy Group and Wade Pfau from The American College share some tips about how to prepare, no matter how close—or how far—you are from retiring.
What’s the most important step that those planning for retirement can take?
Wade Pfau: It may sound a bit glib but the most important step is to get started. If your employer offers a retirement plan, make sure you get any company match. Strive to save 10%–15% of your salary. Remember, any company match is part of that total percentage. So if you get a 5% match, that’s included in your 10%–15%.
Colleen Jaconetti: Save early and often. The earlier you begin saving, the longer the time you have to benefit from the power of compounding. In addition, consider automating your savings so that you’re essentially paying yourself first.
Wade Pfau: An irony of life is that, if you start saving when you’re young, you get more benefit from compounding. But often you don’t have the opportunity to save until you’re older. That’s when your salary peaks and your kids are through with college. Then, you may have more disposable income that you’re finally able to save, but less time for these savings to benefit from compounding. Your savings won’t have much time to grow before you have to start using them.
How can you find the money in your budget to save for retirement?
Colleen Jaconetti: One way is to put a portion of any pay increases you receive in retirement savings. If you’ve been able to make ends meet without this additional income, allocating it to savings is likely to pay off in retirement. And if you can start saving before you have family or other obligations, you may be in a better position to reduce your savings for a period of time in the future if needed.
I’m a good example. For a period of time after my daughters were born, I reduced my hours at work—and my retirement contributions as well. Each year following that period, I increased my contributions by 1% to coincide with my increases in pay.
How should retirement savers handle market volatility? What about those getting ready to retire?
Colleen Jaconetti: Retirement savers should try to “tune out the noise” associated with market volatility as much as possible. Rather than market changes, it’s life changes that should be the basis for your strategic long-term asset allocation—that’s the percentage mix of stock, bond, and cash investments you have in your portfolio.
If you have a well-thought-out financial plan, including the appropriate asset allocation based on your time horizon, risk tolerance, and financial goals, you should most likely not make adjustments to your portfolio unless something has changed in one of these areas.
Wade Pfau: I share the Vanguard philosophy here. People should realize when they get into retirement, they do have less capacity for risk. Once the market’s already gone through a downturn, it’s too late to do anything about it. But if you’re closer to retirement, you might want to start taking some risk off the table in anticipation of times where there’s more market volatility.
You don’t need to delay retiring if it’s time and you’ve been saving adequately. One of my early research articles about safe savings rates suggested you don’t have to worry as much about your specific wealth accumulation at retirement because when the market goes down, the subsequent sustainable spending rate (the percentage you can withdraw from your portfolio) will increase, historically at least.
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