The secret to your retirement is one simple action item that will make you feel better while preparing for retirement and feel more confident about your financial security.
That one action item: Put your retirement plan in writing.
A recent Schwab report shows that people who have a written retirement plan were 60% more likely to increase their 401(k) contributions and twice as likely to stick to a monthly savings goal than people without such a plan.
Similarly, a Wells Fargo/Gallup survey released earlier this year found that investors who had written down their plans for retirement were almost twice as likely as those who didn’t to feel they would have enough money to maintain their lifestyle after they retired.
“Putting your plan in writing makes planning for retirement less intimidating” says Joe Ready, head of Wells Fargo Institutional Retirement and Trust. “It helps you see what steps you need to take, which builds confidence and makes it more likely you’ll follow through.”
Unfortunately, not enough people go to the trouble of putting pen to paper (or, as is more likely the case today, fingers to keyboard). According to the Schwab study, only 24% of Americans say they have a financial plan in writing.
Which is a shame, because it’s not as if you have to produce a magnum opus to significantly improve your shot at a secure retirement. Indeed, I’d say you should be able to reap the benefits of a written plan with a straightforward document that includes these three basic elements:
1. A Target Savings Rate
This is the cornerstone of any retirement plan, as the amount you stash in 401(k)s, IRAs, and other retirement accounts during your career will have a major impact on how comfortably you’ll be able to live in retirement.
The amount you should be saving each year depends on, among other things, how much you earn, how much you already have saved, and the age at which you plan to retire. But many pros recommend you shoot for a target of 15% a year, a figure that would include any employer contributions to your accounts. The Boston College Center For Retirement Research’s Target Your Retirement tool can help you arrive at a rate that makes sense given your financial situation.
If you can’t hit your target savings rate now, fine. Do the best you can, but make sure your plan includes a specific route to reach your target, say, by increasing your savings rate a percentage point a year or saving a portion of each pay raise you receive.
2. A Long-Term Investing Strategy
I’m not talking about anything complicated here, like moving in and out of stocks and bonds or different market sectors based on Fed policy or technical market indicators. Rather, you just want to set a stock/bond mix that can generate the returns you’ll need to build a nest egg that will be able to support you throughout retirement yet also provide protection during market setbacks.
One way to arrive at such a mix is to rev up a tool like Vanguard’s Investor Questionnaire, which will suggest a mix of stocks and bonds based on your risk tolerance and how long you intend to keep your money invested.
Click on the “other allocation mixes” link and you’ll see how your suggested mix as well as other allocation strategies have performed in the past as well as in especially good and bad markets. If you don’t feel you’re up to creating your own stock/bond allocation, then you might consider investing in a target-date retirement fund or managed account, options that set and manage an asset mix for you.
You might also include a note in this section of your plan to make sure you’re not overpaying in fund fees. You can find low-cost funds of all types and styles, including index funds and ETFs, by checking out the MONEY 50, MONEY’s list of the 50 best index funds and ETFs.
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3. A Regular Monitoring Plan
It’s not enough just to have a plan or even set it in motion. You need to make sure it’s working and make adjustments if it’s not. Which is why your written retirement plan should include a provision for regular monitoring.
I’d say annual reviews should suffice, although you may want to do an occasional spot check if the market appears vulnerable to a pullback or has actually sustained a loss of, say, 10% or more.
Among the questions you’ll want to ask yourself during these periodic reviews: Are you hitting your savings target or making acceptable progress toward it? Can you afford to raise that target? Have stock gains or losses thrown your portfolio’s allocation out of whack? Do you need to rebalance to bring your portfolio back in line? Do you need to change your asset mix as you draw closer to retirement?
You might also review your holdings to make sure that over time you haven’t larded up your portfolio with new funds or ETFs that may have seemed like a good idea at the time but don’t really fit into your long term strategy.
The most important part of your regular monitoring exercise, however, is to confirm that you’re making adequate progress toward a secure retirement. You can do that by going to a retirement tool like T. Rowe Price’s Retirement Income Calculator, which you’ll find in RealDealRetirement’s Tools & Calculators section.
You plug in such information as your retirement account balances, how much you’re saving each year, how your money is apportioned between stocks and bonds, when you expect to retire, and how much income you’ll need, and the calculator estimates the probability that you’ll be able to retire on schedule. If your chances are uncomfortably low — or, worse yet, trending downward from year to year — you can then see how making changes like saving more, investing differently, or staying on the job a few more years might improve your outlook.
None of this is to say that a written plan is some sort of a silver bullet. It’s not; you’ll still have to do the actual saving and investing.
But by putting in writing the steps you’ll need to take and then monitoring your progress and making adjustments as you go along, you’ll be much less likely to find yourself on the threshold of the date you hoped to retire, but woefully unprepared to do so.
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