5 Ways to Protect Your Retirement Savings

May 15, 2024|Kurtis Thompson

Bottom Line Up Front

  • Develop a retirement plan with a financial advisor or retirement expert, and diversify both your asset allocation and asset location to protect and grow your savings effectively.
  • Investing frequently, even in small amounts, will help you leverage compound interest and build a substantial nest egg over time.
  • Resist the urge to time the market or frequently trade, and avoid early withdrawals to ensure you maintain steady growth and minimize setbacks.

Transitioning into retirement can feel overwhelming, especially when you consider the shift from saving to spending money. It’s a significant life change, and feeling a bit uncertain is completely normal. After years of diligently saving, you might be wondering how to protect your retirement savings. Here are 4 strategies to help you get started: 

1. Have a Plan

According to a study done by Northwestern Mutual, over 50% of people have no plan for their retirement savings. 

If you don’t know how much you need to save, you take a huge risk of not “getting there.” The Median American household has $164,000 in retirement savings according to the Federal Reserve’s 2019 wealth survey. For most people, when combined with average Social Security income, that’s not enough to provide the retirement most hope for. 

Talk to a financial advisor to get a picture of what you need to save to achieve the retirement you want or use a free tool like this retirement calculator to get started. 

Even a vague idea is better than nothing and lets you start planning how much you need to contribute now to achieve your goals. 

2. Diversify

Everyone talks about diversification, but many people focus on spreading their investments across different types of assets and forget the importance of spreading those investments across different accounts or locations.

Asset Allocation

Asset allocation is a key aspect of protecting retirement savings. Having the right mix of asset classes (stock, bonds, cash, etc.) for your risk tolerance and time horizon, as well as a mixture of assets within each asset class can help you avoid large losses that may happen in an individual stock or bond as well as losses that may happen for an entire asset class (eg. a 25+% loss in the stock market during a recession). It’s so key that most people have heard it discussed many times before, however, the second layer of diversification is something that is often overlooked.

Asset Location

Asset location refers to the type of account that assets are held in; taxable, tax-deferred, or Roth. Asset location is a strategy that helps minimize the most guaranteed of “losses” to your retirement account… taxes. Having assets located in different types of accounts allows flexibility in your withdrawal strategy to manage taxes while still generating the income you need from the portfolio. Business owners have the added bonus of being able to manage employer contributions to a 401(k) and Cash Balance or other Pension plans in their asset location mix.

3. Focus On How Often You Invest 

For this one, we’re pulling advice from someone you’ve likely heard of before, Warren Buffett. Mr. Buffett’s investment philosophy emphasizes that how frequently you invest is more critical than the amount you’re investing. In a CNBC interview, Buffett advised that even if you can’t make large enough contributions, the key is to keep investing regularly, no matter how small the amount. He stated, “I think it’s the thing that makes sense practically all the time.” 

This approach leverages the power of compounding interest, where even small, consistent contributions grow significantly over time, building a substantial nest egg by retirement.  

4. Don’t Try to Time The Market 

A risk that investors pose to themselves is market timing and frequent trading in retirement accounts. Individual investors consistently underperform the stock and bond market average return. Estimates range from 1%-3% per year that individual investors underperform stock market benchmarks. 

Human psychology seems to cause us to buy high and sell low. We panic when markets are going down and sell, then buy back in after they have gone back up missing out on all the returns in between. To protect your retirement savings in the long run; figure out your risk tolerance, invest in a diverse portfolio of stocks and bonds, rebalance your asset allocation periodically, and don’t make changes to the plan based on recent market performance! 

If you want to actively invest in the stock and bond markets, making stock picks and timing the market, set aside some money in non-retirement accounts that you can play with without putting your retirement savings at risk.

Here’s a free tool to discover your risk tolerance: https://investor.vanguard.com/tools-calculators/investor-questionnaire/questions

5. Watch Out For Early Money Withdrawals

According to a Bankrate survey, 51% of people with retirement accounts reported that they have taken withdrawals from their accounts before retirement. Early withdrawals from retirement accounts will set back your progress toward your goal. To protect your retirement savings, make sure early and unplanned withdrawals from a retirement account are a last resort in financial emergencies.

You’ve Got This

 A slow and steady plan to reach your goals and a healthy dose of discipline to follow the plan will go a long way toward securing your dreams for the future. Diversify your accounts and investments, keep it simple, stick to the plan and you’ll set yourself up for a great future. If you have any questions, you can reach us here. We’re here to help.

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