There are plenty of retirement savings tips floating around the Internet, and some carry more weight than others. Whether it’s choosing a fund, deciding how much to contribute or calculating healthcare costs, the wealth of information and advice out there can be daunting.
But if you’re trying to figure out how to make your hard-earned nest egg last, there’s one piece of advice that stands above the rest: When it comes time to decide whether to roll your 401(k) plan into an IRA, pay attention to fees.
Here's why. (For more, see: 5 Benefits of Rolling Over a 401(k).)
Why Fees Matter
There are few things investors can control about making retirement funds last. They can’t predict the market or the latest hot stock. But they can decide to put their money in a fund with fewer fees.
The average fee for an IRA is 1%. That may seem small, but consider this: choosing an IRA with 0.7% fees instead of one with 1% fees could mean hundreds of thousands of dollars in your pocket down the road. Choosing an account with low fees is as important as choosing one with high returns.
How to Avoid High Fees
Funds are required to list fee costs so that potential investors can do proper research. Along with comparing performance and stock holdings, they can see how much fees will cost them.
It’s not always the highest-performing funds that have the highest fees. While it may take work to find them, there are IRAs that offer respectable returns without exorbitant fees.
Index funds and exchange-traded funds (ETFs) are well known for having solid returns, solid diversity and low fees. Some may even be as low as 0.20% – a much better deal than 1%. (For more, see: Why Are ETF Fees Lower Than Mutual Funds?)
Live on less. The traditional withdrawal rate for retirement accounts is 4%. But there’s no guarantee that if you only withdraw 4%, your nest egg will carry you through all the way. Retirees still need to track their portfolio to see if they’re spending faster than their investments are earning.
Remember your required minimum distributions. Besides fees, penalties can take another chunk of money from a portfolio. A traditional IRA requires policyholders to take a distribution starting at age 70½ and every year thereafter. If they don't, the IRS will assess a penalty. Required minimum distributions are only required of traditional IRAs, not Roth IRAs – another benefit to using one. Read Roth vs. Traditional IRA: Which Is Right for You? for details. "There is usually a window of time after retirement and before 70½ when retirees can take advantage of Roth conversions," says David S. Hunter, CFP, of Horizons Wealth Management in Asheville, N.C.. "This allows for shifting from tax deferred to tax free at optimal tax times."
Delay Social Security. An easy way to grow retirement savings is to delay taking Social Security benefits until age 70. For every year after the age of 66, the monthly benefits will increase. "As the law is currently written….postponing Social Security is the only guaranteed 8% per year investment return!" says Hunter. "You will be hard pressed to find any advisor who would claim to be able to do better." Unless there's a health reason for making a different choice, seniors who cannot afford to wait that long should at least hold off on taking benefits early. They are eligible to take Social Security starting at 62 years old, but this will decrease monthly benefits significantly. In some cases, seniors may be able to double their benefit by waiting until 70.
Consider longevity insurance. Like all forms of insurance, longevity insurance banks on the retiree living a long life. The insured buys a policy at age 65 and then the policy kicks in at age 80 or 85, paying a monthly stipend. For seniors who anticipate a long life, this strategy could help ensure they’re not eating cat food when they’re 90 years old.
The Bottom Line
It can get stressful trying to stay on top of every new piece of advice the experts are peddling. Keep it simple: Avoid high-fee plans and know when it’s a good or bad idea to roll over to an IRA. If you aim for low fees and high returns – and put enough into those funds – you've done most of what you can do to ensure a comfortable retirement. (For related reading, see: An Introduction to Roth IRAs.)