These days, it’s easy to look at your retirement accounts and come to the conclusion that you’re off track from where you need to be to retire on time. After a rough market in 2022 and the start of 2023, marred by continuing inflation and an uptick of bank failures, it can certainly seem like that dream of comfortable golden years might be slipping away.
Still, where there’s a will, there’s most likely a way. Given the recent challenges we’ve all faced in the market, three Motley Fool contributors volunteered their suggestions on how to try to get back on track. They suggest:
- shifting your allocation to blue chip stocks;
- using the catch-up contribution rules to boost your contributions to your retirement account; or
- simply aggressively buying index funds in an ordinary brokerage account.
Read on to find out why, and decide if any of these strategies might work for you.
Consider going blue
Eric Volkman (Shift allocation to blue chips): There’s a lot to be said for placing bets on either beaten-down stocks or undiscovered sleepers with high potential. An emphasis on such titles might not be the best play for those in retirement, however, as they can be very volatile. Investors in their golden years are often better served by weighting their portfolios more heavily in favor of blue chip stocks.
Blue chips, for those unfamiliar with the term, are the stocks considered to be among the most valuable, steady, and reliable on the market. Many are leaders in their sectors. They tend to be reliably profitable companies with a relatively long history of making money and generating positive free cash flow.
These rocks of the economy also have a habit of paying regular dividends, which makes them particularly appealing for retirees. After all, who doesn’t like getting a reliable stream of payouts from their investments as a form of income?
With its great breadth and depth, the U.S. stock market has plenty of solid blue chips to choose from. What’s more, most are either familiar companies in their own right, or produce some of the goods and services we use on a regular basis.
You might not necessarily be acquainted with Johnson & Johnson (NYSE: JNJ), for instance, but you’ve surely used one of its Band-Aids when stricken with a cut or scrape. PepsiCo (NASDAQ: PEP) surely rings a bell thanks to its near-namesake Pepsi lineup of soft drinks, yet many are unaware the company also has a massive snack business, with perennial favorites like Lay’s potato chips and Doritos in its portfolio.
As with a host of blue chip stocks, Johnson & Johnson (whose consumer health business will soon be spun off into a new company called Kenvue) and PepsiCo both pay dividends. And neither payout is stingy: Johnson & Johnson’s dividend yield is currently just under 3%, while PepsiCo’s clocks in at 2.6%.
Over 50? Take advantage of the “catch-up” loophole
Jason Hall (Use catch-up contributions to boost what you save): The maximum 401(k) contribution you can make in 2023 is $22,500, while contributions to a traditional IRA or Roth IRA (with limits based on how much you earn) are capped at $6,500. That’s a lot of potential money you can put away each year, but the reality is that few people actually earn enough money to make the most of it.
Feel a little behind for not contributing enough earlier? Well, Uncle Sam lets workers 50 and older save larger amounts: You can put an extra $7,500 each year into 401(k)s, and an extra $1,000 into IRAs, via “catch-up” contributions.
If you’re looking for ideas how to make the most of those catch-up contributions, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) looks like a smart buy right now. Warren Buffett’s diversified company has almost $130 billion in spare cash that Buffett and his investing lieutenants can put to work — either growing Berkshire’s $300 billion stock portfolio, or acquiring whole companies to feed its cash-cow operations. Berkshire minted $37 billion in operating cash last year.
With shares trading around 1.4 times book value, it’s not cheap. But to paraphrase one of Buffett’s favorite observations, it’s a fair price for a wonderful business.
Sometimes, a simple strategy is really all you need
Chuck Saletta (Invest in index funds in an ordinary brokerage account): If you’re behind on your retirement savings goal, one of the simplest strategies out there might be exactly what you need. Just open an ordinary brokerage account and invest as much as you can, as often as you can, into a low-cost, low-churn index fund. Keep it up until you get back on track.
While an ordinary brokerage account isn’t technically tax-advantaged, this strategy does have some great things going for it. First and foremost, there are no limits to how much you can contribute to an ordinary brokerage account, nor are there tight restrictions on where the money comes from that you’re depositing in that account.
For instance, you wouldn’t have to worry about facing Roth IRA excess contribution penalties, just because of a surprise last-minute dividend that pushed you over the income contribution limits. Nor would you have to worry about your employer’s nondiscrimination testing limiting your ability to contribute to your 401k. If you’re already behind on your savings plan, you don’t need surprise barriers thrown in your way that could set you even farther behind.
In addition, with a low-churn index fund, the tax burden of holding the investment in an ordinary brokerage account may not be all that bad. The SPDR S&P 500 ETF Trust (NYSEMKT: SPY) boasts a modest 2% turnover and around a 1.6% yield. Unless you’re making some serious income, qualified dividends are typically taxed at 15% on a federal level. If you invest $10,000 and get a 1.6% yield on that, it gives you $160 of dividend income; a 15% tax on that income is $24.
That works out to about 0.24% of your capital lost to taxes each year while the rest compounds for your retirement, until you need to sell. If you’re worried about catching up from being behind, chances are that the better flexibility you get from not having to worry about retirement-plan restrictions can be worth that fairly modest cost.
Time is ticking — get started now
If there’s one truth when it comes to retirement investing, it’s that time can either be your biggest ally or your worst enemy — depending in large part on how much you have left until it’s time to retire. The more time you have on your side, the better your chances are of being able to put it to use to help you catch up. So if you find yourself behind where you want to be, make today the day you put your plan in place to start recovering.
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Chuck Saletta has no position in any of the stocks mentioned. Eric Volkman has no position in any of the stocks mentioned. Jason Hall has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.