Most investors know (or should know) the tried-and-true methods to help nest eggs grow.
Shift money automatically from your paycheck to a savings plan; take advantage of your employer's matching contributions to 401(k) plans; eliminate (virtually) all consumer debt; track and trim household expenses; reduce investment fees; and, of course, save more than you're saving now.
But with the economy and markets still struggling, investors are seeking, and financial advisers are recommending, additional steps to shore up retirement savings.
1 Dividends
In 2009, more companies cut their dividend payouts -- and fewer companies increased them -- than in any year since 1955.
Now, though, the tide is turning. Tom Huber, manager of T. Rowe Price Dividend Growth Fund, says many companies, after recent spending cuts, are flush with cash. And, as such, dividends are likely to be restored or increased.
In April alone, 25 companies in the Standard & Poor's 500-stock index raised their dividends, and none cut them.
How can dividends help your nest egg? Even in tough economic times, many companies continue to make payouts, generating a steady stream of income. And that income tends to grow over time as companies boost their dividends. According to T. Rowe Price, payouts on stocks in the S&P 500 grew at an annual compound rate of 4.7% between 1980 and 2009, compared with an annual inflation rate of 3.7%.
Of course, dividend-paying stocks have risks. A handsome payout is no guarantee that the share price of the stock itself won't fall. In 2008, an investment of $10,000 in S&P's "Dividend Aristocrats" -- companies in the S&P 500 that have raised their dividends every year for at least 25 years in a row -- would have generated a respectable payout of almost $400. But the value of the stocks would have fallen to about $7,800.
Still, "getting some form of return on an annual basis appeals to more and more people," Mr. Huber says, especially "given low yields elsewhere."
Turning to a mutual fund that focuses on dividends -- such as Vanguard Dividend Growth Fund or Mr. Huber's fund at T. Rowe Price -- is a prudent approach. Among individual companies with solid fundamentals, shares of Coca-Cola, Johnson & Johnson and Procter & Gamble currently yield 3% or more.
2 Downsizing
We know: Trading down to a smaller home in order to save money is a difficult move for many. But consider the assets you need to support your house in later life, says Charles Farrell, an investment adviser in Denver.
A relatively safe rate of withdrawal in retirement is 4%. So you would need $212,500 in savings ($212,500 x 4% = $8,500) just to support your home.
"If you're willing to downsize, it can make a big difference in your retirement," Mr. Farrell says.
3 TIPS and Series I Bonds
With uncertainty still roiling the markets, your retirement savings could benefit from some predictability. Where to turn? Treasury inflation-protected securities, or TIPS, and Series I savings bonds.
Both products are issued by the U.S. Treasury and they offer a hedge against inflation. With TIPS, the underlying principal is adjusted (twice a year) to reflect changes in the consumer price index. I bonds feature both a fixed interest rate and a rate that's adjusted (also twice a year) for inflation.
TIPS normally are recommended for tax-deferred individual retirement accounts and 401(k)s because interest payments are taxable annually. Interest on I bonds can be deferred for the life of the bond.
At the moment, yields on TIPS and I bonds aren't particularly eye-catching. The interest rate for I bonds is 1.74%.
In the long run, though, both investments offer protection from "extremes" in the economy, says Henry K. "Bud" Hebeler, developer of analyzenow.com, a retirement-finances website. "If the recession continues, and if it's severe, you know these investments are safe; they're government-issued. And if inflation jumps, TIPS and I bonds will help you ride out the storm."
4 Your Health
Medical bills are among the biggest nest-egg sappers.
The Employee Benefit Research Institute estimates that a man and woman both age 65 -- with out-of-pocket health costs of $900 in the first year of retirement for each -- would need about $86,000 and $125,000 in savings, respectively, to have just a 50% chance of covering health-insurance premiums and drug expenses in later life.
How to prepare? The basics include checking with your employer about possible insurance benefits before and after age 65; seeking out discount programs; and setting aside savings each month for health care.
Perhaps the best plan is taking care of ourselves. "Good health," Mr. Hebeler says, "is the best medical and long-term-care insurance you can buy."
Write to Glenn Ruffenach at glenn.ruffenach@wsj.com
From the wall street journal published on JUNE 20, 2010