Four simple strategies to build your retirement nest egg

Image1Over the last few decades, individuals have become more and more responsible for their retirement savings rather than relying on their employers or the government to support them.

In the United States, dwindling Social Security funds and a decline in traditional employer-sponsored retirement plans are forcing people to make important decisions about their retirement savings strategies on their own.

Early in an individual’s career, many workers don’t take retirement savings into consideration. They may understand the importance of retirement planning and saving for their future, but struggle with setting clear financial goals and strategies. The shift towards defined contribution plans, which focus on account balances rather than expected retirement income, has compounded this challenge.

While the amount you should save for retirement will differ per individual, a good retirement income — regardless of the source — is one that ensures your standard of living remains consistent throughout your retirement years. If this goal seems daunting, consider four key strategies to improve your chances of a secure retirement.

1. Increase your savings regularly

Having a dedicated savings account provides financial stability, helps manage unexpected expenses, and offers flexibility in retirement. One easy way to do this in your working years is to automate your paycheck so that a set amount of money goes straight into your savings account every time you get paid. If you get a raise, you can increase your savings by keeping your standard of living the same. It helps to live below your means as much as possible and add a larger amount to your automated savings allocation. Remember: saving is different from investing, and they both offer benefits and drawbacks.

2. Embrace a higher level of risk early in your career

Taking more risks allows for the potential of higher returns. This is where it’s most helpful to start planning for retirement as early as possible. The younger you are, the higher your risk tolerance can be, as you have a longer time horizon to ride out market volatility. As you approach retirement, your risk tolerance should decrease.

Higher-risk investments can also result in the power of compounding, where your earnings generate additional earnings over time. Compounding can significantly boost the growth of your retirement portfolio. If you’re unsure about taking risky investments, a financial advisor can help you determine the perfect balance that suits your financial goals and risk tolerance.

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3. Stay in the workforce for as long as you can

While this tactic seems pretty straightforward, it’s important to recognize that putting in a few extra years before retirement can help in several ways. First, you’ll have the chance to save more — not just in your personal savings account but also in any tax-advantaged accounts you may have. By delaying withdrawals from tax-advantaged retirement accounts like a 401(k) or IRA, you allow your investments more time to grow, which can potentially increase your retirement savings. 

Working longer also reduces the number of years you’ll need to rely on your retirement savings, so you’re not left wondering: how long will my retirement money last? And if you’re a full-time employee for the majority of your professional career, this also means you can make the most of employer-sponsored healthcare coverage. This can be especially valuable as healthcare costs tend to rise with age.

4. Take advantage of retirement resources

While the three strategies mentioned above focus on building more assets before retirement, this final approach emphasizes optimizing the use of the assets you’ve compounded upon retirement. For instance, choosing an annuity over a bond allows you to exchange a portion of your assets for a larger guaranteed income throughout your lifetime, relinquishing that income once it's no longer needed.

Despite the significant changes in how individuals approach retirement savings in recent decades, research consistently highlights a timeless strategy for ensuring a comfortable retirement: Begin saving during the early stages of your career, increase your savings as your annual income rises, and establish a structured system to track your financial progress.

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Dimensional Fund Advisors
Written byDimensional Fund AdvisorsContributing writer

Dimensional is a recognized global investment advisory firm that positions itself as a bridge between profound academic financial research and practical investment solutions.