Protect your nest egg

Saving for retirement involves more than just putting money in a 401(k) account and hoping for the best. Using strategies that maximize savings and minimize taxes should help you achieve the retirement lifestyle you want and deserve.

Your nest egg is made up of the money you set aside for retirement, along with the investment income generated by that money. Your overarching goal should be to protect your nest egg by managing investment risk and employing appropriate investment strategies during your savings years and into retirement.

Here are 10 ways you can protect your nest egg and prepare for retirement.

Key learning points

  • There are many ways to prepare for retirement. Contributing to a 401(k) or similar account is just one of them.
  • Be sure to contribute to accounts that offer a premium match through your employer.
  • Educate yourself about Social Security and RMDs before you retire.
  • Align your retirement plans with your spouse or partner to optimize income.
  • Plan major expenses (such as elective surgeries or home improvement projects) and try to pay them before you retire.

1. Set Retirement Goals

Setting age- and risk-oriented investment goals will prevent you from trying to catch up later in life. For example, you’ll need to save up front in your 20s to take advantage of the power of compound interest and employer matching with 401(k) retirement plans, even if it means not paying off your student loans early. The age at which you want to retire should also be a factor in determining your savings goals.

2. Sign up for Employer-Based Savings

Employer-based retirement savings plans such as a 401(k), 403(b), and others will often be your primary savings tools. Employer matching funds – try to find jobs that offer them – multiply your savings at no cost to you. Employer-based plans also typically offer automatic withholding of savings before tax, along with investment education and other tools.

3. Open an IRA

Traditional and Roth IRAs are useful even if you also have an employer-based plan. IRAs can provide access to a wider variety of investments and the opportunity to save even more for retirement. Many financial advisors advise their clients to have both types of IRA because of the unique tax status of each.

4. Keep track of the withdrawal rules

The magic age to withdraw money from IRAs or borrow from your 401(k) without penalty is 59. You will still owe income tax unless you withdraw from a Roth IRA or Roth 401(k).

Thanks to the SECURE Act, there are exceptions, including a $5,000 withdrawal fee for each parent (for a total of $10,000) for a new baby or adoption. But unless you qualify, it’s best to avoid early withdrawal and the additional 10% tax penalty that comes with it. Plus, you lose that valuable compound interest from any funds you withdraw early.

5. Avoid unnecessary taxes

You do not pay capital gains tax on income from tax-advantaged retirement accounts, but you do pay regular income tax upon retirement. Jon Heischman of Heischman Financial Services recommends a strategy that includes placing low (or no) dividend-paying stock in a taxable account and high-dividend stocks and taxable bonds in a tax-deferred account.

Heischman suggests putting mutual funds that pay dividends and capital gains into a taxable account, along with municipal bonds, which are not taxed at the federal (and sometimes even state) level.

If you are 50 or older, you can add “catch-up” to your retirement accounts.

6. Build up a pension income buffer

When you retire, consider supplementing your income to provide a buffer against market fluctuations and unexpected expenses. This could be income real estate property, additional investment accounts, starting a small business, or getting a part-time job. If any of these options appeal to you, it’s best to do your research and make plans before you retire.

7. Time Retirement With Your Spouse

The rules for social security partner benefits are complicated. Know their ins and outs to protect your savings and avoid paying unnecessary income taxes because of bad timing when signing up for benefits. You and your spouse need to make sure you’re both on the same page when you’re nearing retirement.

When creating a retirement plan, don’t forget to make a will or family trust to ensure that your assets and wealth are distributed as you wish.

8. Create a Late Career Strategy

At age 50, you are eligible to make catch-up contributions into your retirement accounts. You won’t have the benefit of compounding, but you’ll likely be able to save for retirement without cramping your lifestyle. This is also an opportune time to review your investment mix to ensure your risk tolerance matches the fact that you are nearing retirement.

9. Plan for Major Expenses

Plan for major expenses such as home repairs or expensive medical procedures before you retire. Whether you need a new roof or hip, do it while you’re still getting a paycheck and covered by employer-provided health insurance. Make charitable contributions when your income is high, not after you retire, and you need less of the deduction.

10. Navigate RMDs in Retirement

Continue to monitor your financial situation, even when you retire. Make financially smart steps before the required minimum benefits (RMDs) kick in at age 72, and make sure the spending plan for your 401(k) or IRA is aligned with your retirement dreams and goals.

It comes down to

Retiring is a time to relax and enjoy hobbies, family and friends after a lifetime of work, not a time for stress and uncertainty. Applying strategies such as allocating savings to your retirement account, investing in IRAs, and planning big expenses before you retire are all ways to help protect your nest by getting and staying on track.

Your reward will be a safe, happy and prosperous next chapter in your life. And a chance to work on your bucket list.