We all know the fable about the tortoise and the hare. And just like in the fairy tale, the tortoises of financial planning — the ones who slowly but steadily achieve — usually come out on top. If you delay planning and saving for retirement, that could leave you in the role of the frantic hare, racing to catch up before you reach the finish line. To help you plan your trajectory on the retirement race course, here are some mile markers for each decade of life.
Your 20s
The best time to launch a financial plan is when you’re first establishing your career. You’re out of school and starting to make your own money. And you probably don’t have a lot to spare after you pay your bills. But before you buy that gorgeous handbag or head off for that weekend in Vegas, establish the habit of paying yourself first through a regular program of saving. Suppose you start out earning $40,000/year at age 25 and contribute 10% of your salary to a 401(k) with an average annual rate of return — and your employer matches your contributions 50% up to your first 6%. If you maintain that level of contribution, you’ll have more than $2,000,000 in your retirement account by age 65. But if you wait until 35 to start contributing, you’ll net only about $825,000 — well less than half of what you’d have if you started earlier. It’s hard to overstate the importance of starting retirement saving early.
Your 30s
Hopefully, this will be the time to build on the good habits you set in your 20s. By now, you’re probably a few years into your career path. You might be married. You may even have a mortgage and a kid or two running around. All of those things translate into higher expenses. Even with increases in income, you may still struggle to keep saving at the pace you want. But this is one battle you need to win. Avoid the temptation of borrowing against your future to finance today.
If your employer has a 401(k), hopefully, you’re already in it. But if enrolling somehow fell off your radar, sign up right away — especially if your company offers a matching contribution. If you don’t, you’re just leaving free money on the table. Don’t give in to the urge to use credit indiscriminately. Mind those card balances and pay them down while you continue to save for retirement and other financial goals.
If you have children, this is a good time to consider setting up a tax-advantaged education account for them. It doesn’t have to start large — even small amounts you let accumulate can make a big difference by the time you’re ready for your little ones to head off to college.
Your 40s
You’re probably in a bigger house with a bigger mortgage, bigger kids and bigger expenses — but also a bigger income and a bigger 401(k) balance. As you earn and invest more, having a prudent tax strategy becomes even more important. You’re working hard to bring home that paycheck and want to keep as much of it as possible. Your financial advisor can help guide you toward more a more tax-efficient investment strategy as you navigate this more complex — and rewarding — stage of life.
Believe it or not — you’re now probably at about the halfway point between your first real job and retirement. This is a good time to take stock of where you are. You should have a better feel for your trajectory — where you’d like to end up and how much it’ll cost when you get there. Sit down with your financial advisor and map out the details of your retirement plan. How much longer will you work? Where will you live after? What will you be doing? Will you continue to earn income in retirement? This time is critical because, at 45, you still have two decades to keep saving and investing.
Your 50s
You’re approaching your peak earning years. If you have outstanding debts (other than your mortgage), make a plan to retire them before you do. The loan you took out for the RV or boat? Pay it off. Likewise with the vacation place upstate. You’ll have so much more financial freedom later on if you do.
Take a closer look at your healthcare options. Do you plan to rely on Medicare in retirement? Bear in mind that Medicare has significant shortfalls when it comes to long-term hospitalization and especially custodial care. Talk to your financial advisor about your overall health and any need for long-term care insurance to provide for your (or your partner’s) future needs.
If you find your contributions to your 401(k) are coming up short of your goals — maybe you’re borrowing against a retirement account during a downturn to pay for health costs or college — the IRS allows people over 50 to make “catch-up” contributions over and above annual limits. The amount can change from year to year, but take advantage of the valuable opportunity to get your retirement back on track if you need to.
Your 60s
This is the payoff — the decade when you can hopefully throttle back a bit and begin enjoying life more. If you’ve followed the path above, you should have savings to help smooth out your transition to retirement.
One of the most important decisions you’ll face is when to begin taking Social Security benefits. You’ve probably paid into the Social Security fund for 30 or 40 years, and you should make the most of the income you’ve earned. Monthly payments are higher if you wait to start collecting, but there are other factors to consider. Talk to your advisor about your circumstances and your needs in this critical area.
Slow and Steady Wins the Race
If you’re on the starting line of the race to retirement, remember that it’s more of a marathon than a sprint. Sometimes it may not feel like you’re getting where you want to be fast enough. While it can be tempting to look for shortcuts and quick fixes along the way, trust that the steady pace, and sustained effort of the tortoise can get you safely to the finish line and the retirement you dream of.
Sources