No one is going to plan your retirement for you—at least not for free. A paid financial advisor can certainly direct your capital to the right stocks, bonds, and funds, but so can you. It may take some time and effort to truly wrap your head around the investment landscape, but the end results are going to be a lot cheaper, and the education can benefit you for years to come.
The very first step to take when planning your retirement saving strategy is, simply, to commit to doing it. Because of the power of compound interest, the earlier you can start loading your accounts with capital, the more you’re going to have when you finally call it a career. Of course, a lot changes between your 20s and your 50s—income, family situation, risk preference, and so on—and your investment strategy should change accordingly. Take a look at the following timeline, and start setting yourself up for a comfortable retirement today.
Your 20s
Take the first step.
You should start to plant the seeds for an enjoyable retirement in your 20s. Begin by opting into your employer’s 401(k) retirement plan. The earlier you start, the better. A 25-year-old who invests $200 per year for eight years can actually end up with more money than a 35-year-old who invests $2,000 per year for the next 32 years. By starting early, you gain substantial interest on your money, giving yourself more funds with which to diversify your retirement plan.
Develop good lifelong habits.
Now is also the time to develop good spending and saving habits. The financial decisions you make in your 20s have the power to affect you for the rest of your life. Live frugally, craft an effective budget, open a savings account to stash your surplus, and don’t give in to the many spending temptations that come at this age.
Your 30s
Open an IRA.
You’re getting a little older now, and it’s time to sharpen your focus on your retirement goals. If you haven’t opened an IRA yet, do so now. You’re probably making more money than you did in your 20s, and while you should enjoy a slightly increased quality of living, stay smart and use some of those increased earnings to fund your retirement savings. You can open a traditional IRA or a Roth IRA, depending on your employment and tax situation.
Also, consider bumping up your 401(k) contributions. I’ve made this a habit of mine every time I receive a raise at work. If you restrain yourself from unnecessary purchases, you won’t notice the difference.
Develop your investment portfolio.
The stock market is a great place to start your investment portfolio. Consider riskier options now because retirement is still far off. There’s plenty of time to weather any downturns in the market, and the potential upside is very attractive. Of course, you should consider diversifying into some safer investments as well, including a mutual fund or CD, just to balance out your risk.
Your 40s
Prioritize your retirement planning.
As you enter your 40s, retirement planning should become more of a priority because you’re getting closer to the finish line. If you have a family, budgeting can be a juggling act, as you’ve likely got a lot of added expenses. Resist the urge to cut back on your contributions or withdraw funds from your accounts to pay for current household expenses. Doing so puts your golden years at risk, and the tax penalties for early withdrawals are substantial. If you need more money for daily expenses, find other areas in which to trim costs.
Consider the following example: Assume you invest $400 per month in a tax-deferred savings plan, earning 6 percent interest, from the age of 25 to age 45. Then, from age 45 to 55, you reduce this contribution to $200 per month because you need to spend more on groceries. You eventually bump it back up to $400 from age 56 to 65 after you’re more comfortable.
It may seem like you only took a small dip in your retirement savings over those 10 years, but in fact, you just decreased your nest egg by almost $100,000. Keep this in mind as you balance your near-term spending with your long-term investment goals.
Manage retirement accounts and plan ahead for other needs.
You should continue to bump up your 401(k) contributions and invest the maximum allowable amount into your IRA. If you have other retirement plans from previous employers, consider consolidating them into one IRA to make your portfolio easier to manage.
Got kids? Give serious thought to starting a 529 college savings fund for them. Paying for their university educations completely out of pocket could have a significant impact on your retirement plans.
Consider your employment timeline and goals.
Devote some thought to branching out from your current employment situation. Do you have a special talent or skill you may be able to turn into a successful side venture? Consider starting a business and earning some additional money on the side. Then, send it directly to your retirement accounts. If you’re successful, you just might find yourself hanging it up much earlier than you expected.
Your 50s
Determine your retirement goals.
Now is the time to seriously evaluate your retirement goals. Take a good look at where you are, where you want to be, and how long it’s going to take you to get there. The type of life you envision for yourself upon retirement can go a long way toward determining how much money you’re going to need. Experts estimate that it takes at least 70 percent of your current income to retire comfortably.
Increase contributions to your 401(k) and IRA.
As you’ve hopefully done every decade, continue to bump up your retirement contributions if possible. It’s a lot better to find yourself with too much money when you hang it up than not enough, so invest whatever you can.
Evaluate your portfolio.
This is an important time to evaluate the allocations in your investment portfolio. You may want to steer toward a more conservative strategy and reassess your riskier investments. You’re closing in on retirement and you no longer have the time to ride out severe market swings. Investing in bonds, among other things, is always a good choice for the more conservative-minded.
Final thoughts
If you’ve missed the boat on some of these stages, it’s never too late to catch up. The one thing that should carry through your strategy, regardless of age, is a goal of devoting as much as possible to your retirement investments. Once you reach those golden years, you’re not going to be able to earn money like you did when you were younger. The most valuable asset you can invest in now is your future. Get going today.
Are there any other essential retirement tips you think should be added to this mix?
David Bakke writes about money management topics including insurance, retirement, investing, and credit.
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