Saving money is the main thrust of retirement planning, of course, but time is by far the most important tool when growing your savings. The key to retiring in your 60s is to make the right financial decisions in the decades leading up to your retirement. Without time, your savings and the multitude of other financial instruments would not have time to grow and see their full benefit.
To begin your financial journey, saving for retirement should be an explicit goal. It’s helpful to envision an actual dollar amount as your retirement savings goal. This makes your personal retirement a real target, not an abstract idea.
There are a few ways to come up with your own personal retirement number, so discuss your situation with a financial advisor to see what’s realistic and reasonable for you.
It’s a common misconception that retirement planning isn’t important until you’re in retirement age. In fact, there are steps you can be taking early on in your career. As a financial advisor in Greenville, SC, I’ve seen firsthand what can happen when retirement planning is pushed to “later.”
You’re more likely to reach your goals if you’re proactive and start planning early on. Let’s take a look at what you can be doing now to make the transition easier.
Money in Your 30s: Get Serious and Establish Good Financial Habits
In your 20s and 30s, retirement can easily become an afterthought, as you focus on climbing the corporate ladder and enjoying your newfound adulthood. But this timeframe is critical to build good financial habits early in your working life, while avoiding major pitfalls.
Budget habits are the building blocks to wealth building. In your 30s, it’s important that you work to live within your means, so you can start making longer strides in your savings and investments.
If possible, configure your income and spending so that you can set aside money into your personal savings and retirement accounts every pay period. In your 30s, a good savings goal is 15 percent of your income, up from 10 percent during your 20s. Now is also an excellent time to begin investing. You will likely have a long-term time horizon for retirement, so your investment portfolio strategy can be anywhere between moderately conservative and aggressive. Make sure you have a legitimate risk tolerance test when creating your financial plan.
This period of time is also a great opportunity to build an emergency fund. Try to set aside three to six months of savings, that will serve as a bridge between times of financial emergencies.
Bad debt is a major pitfall at any stage of your financial life. But credit card companies prey on younger individuals, due to their lack of experience and spending habits. Currently, the average household carries $8,300 in credit card debt. With interest rates exceeding 20 percent in some instances, large debt balances can take several years to pay off, eroding your discretionary income and potentially damaging your credit score. (Read my recent blog post: Why I Preach Debt Free? Coronavirus!)
With a poor credit score, the important purchases you’ll make in the future, like a car or new home, will become considerably more expensive. Do your best to use your credit cards for planned instances only.
Money in Your 40s: Maximize and Optimize Your Financial Picture
Your 40s is when your income level typically starts to peak. During this period, capitalizing on your higher income by contributing the maximum to your retirement accounts is a best practice. Your expenses may naturally increase with your income level, so make sure to purposefully and intentionally invest your savings with your goals in mind. Be sure to keep your six-month emergency fund fully stocked here, as a financial emergency, like a job change or economic downturn, hurts high-earners more. Who could have predicted today’s pandemic?
Now is the time to initiate a relationship with a financial advisor if you don’t already have one, so you can further optimize your retirement planning. Your 40s is also a good time to broaden your overall portfolio, by looking into other income generators, such as real estate or a side business. If you can afford it, consider insurance policies that can protect your family. Remember to discuss your insurance needs with a fiduciary financial advisor so you’re not sold a policy you don’t need.
With higher income comes higher taxes, so now is the time to ensure you utilize every tax advantage you have at your disposal. This can be deductions from your retirement accounts, as well as deductions you can obtain from your home, business, family needs, charity and more.
The more you save on taxes, the more you can invest or save. The more you invest, the more your wealth can potentially grow. Integrating tax-planning strategies into your financial plan will ensure your savings are working for you, not against you.
Money in Your 50s: Protect Your Legacy and Assets
Your 50s are a great time to make higher, catch-up contributions to your retirement accounts, and think more seriously about your retirement and future legacy. As you get closer to retirement, use every opportunity you can to save for these years and get your financial affairs in order. It’s a perfect time to look at all of your retirement assets and evaluate if it can support your desired retirement year.
Your portfolio should reflect the number of years you have until your personal retirement date. Work closely with your financial advisor to make sure your portfolio strikes a delicate balance between growth potential and asset preservation. Don’t overestimate the market’s performance, as a severe market decline can take years to recover, which can force you to postpone your retirement date.
This decade of your life is also a great opportunity to organize your legacy as you see fit. Designate beneficiaries to your accounts, create a will if you haven’t already, and start deciding between what assets you’ll leave to your family, and what assets you’ll earmark for your own retirement.
Now is the Time to Plan for Retirement
As the proverb states, “The best time to plant a tree was 20 years ago, the second best time is right now.” The same applies to your financial planning. If you are behind in your retirement savings, don’t beat yourself up. Just try to find a way to save and get back on track. For every action you take today, you will see a benefit tomorrow.
Work with a financial advisor, and use these best practices to create your best financial life in the future. If you’re looking for a financial advisor in the Greenville, SC area, contact Global View to see how we can help.