Retirement savings goal: Set aside 10% of your pay, expert says

Use the new year to focus on things you can do right now to strengthen your retirement plan

Building up an adequate nest egg for retirement is difficult. One reason it's so challenging is we face a lot of distractions along the way. And 2022 was a year filled with such distractions. First it was unexpected inflation, then a war, accompanied by sharply rising interest rates and painfully falling stock prices. Then, out of nowhere, along came some equally unexpected good news. A scientific breakthrough in nuclear fusion, the ultimate renewable energy, that reminded us of our seemingly infinite ability to innovate.

Overall, 2022 was a pretty miserable year for investors as a simultaneous selloff in stocks and bonds left many with double-digit losses. While your fourth-quarter 401(k) statement may reflect some improvement, it won't be enough to make up for the previous three quarters. Faced with unsettling losses, investors need to resist the urge to panic and focus on the end goal.

Down years for the stock market are actually not that unusual. In fact, over the past 100 years, the market has averaged 2.5 down years per decade. During the drawdowns, the average loss was 14% in a calendar year, with the worst being the staggering decline of 47% in 1931. Interestingly, in the year following a selloff, the market has bounced back on average 12%, with up years outnumbering a second consecutive down year 2 to 1.

What could drive the stock market higher in 2023? Trillions of dollars of latent stimulus continues to support the economy despite stronger than expected inflation and multiple Federal Reserve rate hikes. So while the odds of the U.S. falling into a recession later in 2023 are elevated, especially once the leftover stimulus is exhausted, we expect the economic news for the next couple of quarters to be reasonably supportive.

While it's always interesting to consider the near-term direction of the stock market, let's use the new year to focus on things you can do right now to strengthen your retirement plan. The most common mistake people make with their retirement planning is failing to save enough. At a minimum, you should save enough to capture any dollars your employer offers to match. Consider it a raise and realize that capturing your employer's full match accelerates the growth of your retirement nest egg.

Ideally, you should strive for annual retirement savings of at least 10% of your income. If you're not currently saving 10%, I suggest you investigate a recordkeeping tool called auto-escalation. This feature increases your annual savings rate by 1% of pay each year until you tell it to stop. It's a great way to gradually and painlessly increase your savings rate over time.

Next, because identity theft has become such a widespread problem, everyone should take steps to protect their hard-earned retirement savings from cyber thieves intent on impersonating you on-line to drain your account.

Protect your account by registering your on-line account with your plan's recordkeeper. This is critical because if you never go online and set up your account, you leave the door open for someone who has purchased your personal information on the dark web to register your account with their own address and request a withdrawal check.

Also, your retirement account should be set up with multi-factor authentication. This requires anyone who logs into your account to input a code, which is sent via text message to your cellphone, before they can gain access to your account. It's also important to keep your email current on the system because most recordkeepers send alerts by email after any change in your personal account information or a distribution.

Some systems now also offer voice authentication or an additional passcode to authorize a distribution. I highly recommend you implement these additional safeguards, if made available, to protect your account against identity thieves. Finally, it's a good idea to check your account online at least quarterly.

While you're setting-up those safeguards, also check your beneficiary election to verify it's on file and up to date. It's easy to do and easy to change when necessary. If you get married, divorced, or create a trust to serve as part of your estate planning, make sure the beneficiary designation you have on file correctly expresses your wishes. Be advised, your retirement plan beneficiary designation supersedes your will, so be sure to keep your beneficiary designation up to date.

If 2022 was a year you would prefer to forget, that would be perfectly understandable. Fortunately, history suggests better days lay ahead. Perhaps 2023 will be that bounce back year, but until those positives materialize, take care of what you can today by staying invested for the long-term, increasing the amount you're saving, and ensuring your retirement accounts are properly protected.

Michael J. Francis, is president of Francis Investment Counsel LLC, a registered investment adviser with offices in Brookfield, and Minneapolis.

Use the new year to focus on things you can do right now to strengthen your retirement plan