When you’re starting your first full-time job in your 20s, you may not be thinking about retirement in 40 years. It’s much easier at this point to think about budgeting for rent and nights out and saving for your next big trip.
The same goes for your 30s, 40s and even 50s. There is always something on the horizon you could be saving for besides your retirement. However, understanding your retirement goals and managing your accounts sooner rather than later is the best way to prepare for the day you clock out one last time.
With the help of a smart financial advisor and a solid budget, you can move toward confidence in your retirement plan—at any stage of life.
Before diving into saving strategies for different life stages, let’s take a look at the different types of accounts you could invest in:
And next, how that money goes in and out of the account:
Traditional: Contributions are made before tax but withdraws in the future are subject to ordinary income taxes. Examples include Traditional IRAs and most types of employer-sponsored plans.
Roth: This account feature means you make contributions after tax, and then future withdrawals are tax-free on the conditions the account is held for at least five years and you are age 59 ½ or older. Examples include Roth IRAs and Roth 401(k)s.
Darby Affeldt, DVM, RICP®, financial advisor in Seattle recommends different accounts based on life stage, “In general, the Roth IRA is a great place to start early in our careers; tax free income is going to become more and more important in retirement if taxes go up, but the employer plan match is KING—take advantage of it as soon as possible!”
Brad North, CFP®, Minneapolis financial advisor, says the type of account matters, but not as much as your dedication to saving.
“Saving money and sticking to a long-term strategy is what matters most,” He says, “Investor behavior is the dominant determinant of results. Financial advisors help investors stay focused and not abandon long term investment strategies at key moments of decision making.”
Often, it is best to bring all your retirement options to a financial advisor for recommendations on the best strategy for you based on your current situation.
While retirement may be far off, saving for it shouldn’t be. As soon as you graduate and start earning a regular income, you should begin working with a financial advisor to organize your investments and retirement savings.
Affeldt says, “Managing, prioritizing and spending below ones’ means are key habits to establish now. First, make a budget and discipline yourself to stick to it, and if you overspend one month, reel it back in the next month. Pay your Future Self first; save, then spend.”
Making savings a habit now means you’ll benefit from compound interest and make more for your money over time.
With the recommendation of your advisor, get started by saving for retirement in a 401(k), IRA or another investment account. Your advisor can also explain and educate you on different types of accounts and their characteristics, as well as helping align your investing strategy with your other financial goals.
If your employer offers an employee benefits package, understand your options and make the most of what is available to you. Many employers offer a matching program up to a set percentage of contributions. Even a small monthly contribution from your paycheck will build on interest in the years between now and retirement.
There are multiple reasons to start working with a financial advisor. As your financial picture grows increasingly more complex, bringing in a professional can provide guidance, expertise, and accountability when you need it most.
Whether you have a specific topic you’d like another opinion on or you’d like guidance on your financial strategy as a whole, a financial advisor can provide you with valuable input and insight.
Your financial advisor can help you identify whether the options offered are sufficient for you or if an additional product is recommended.
Age Started Saving
Total Retirement at 60 Years Old
*Hypothetical example at 8 percent annual interest rate for illustrative purposes only.
Here’s how the advantage of time works. Compound interest is a mathematical principle where interest accrues not only on the amount you invest—but also on the interest accrued on it.
This is a hypothetical example of three investors who all started saving at a different age. You see the power of compounding in Anna’s example. She started saving at age 25. She contributed a total of $84,000 over 35 years and has $413,560 thanks to the effect of compound interest building over time.
Rob starts 10 years later, investing the same monthly amount as Anna. Missing out on 10 years of compound interest costs Rob over $200,000.
Finally, John is a later starter at age 40. He puts in more than the early starters—$96,000 over 20 years—but with less time for compounding, he has $219,657 upon retirement. He invested more total but has less at retirement than Anna.
DISCLAIMER: This hypothetical example is for illustrative purposes only. Not based on any particular investment. Assumes 8 percent annual return. Investments will fluctuate and when redeemed, may be worth more or less than originally invested.
As your income increases or you start paying off some loans and debt, resist the temptation to channel all those new available funds into lifestyle changes. Instead, consider how you can increase your retirement contribution.
“Once you get started, give your retirement savings a raise when you get a raise,” recommends Joe Fox, CLU, ChFC, CLTC, financial advisor at North Star Resource Group. “Say you get an annual increase of 3%. Take 2% in your paycheck and increase your retirement plan contribution by 1%.”
Affeldt adds, “Please take advantage of any workplace retirement plan with an employer match, if credit card debt and emergency reserves are in place. If there’s no match, think about saving on your own in the Roth or the Traditional IRA. While retirement seems so far off, consider that saving is simply delaying spending. Time can either be our ally if we are planning early or our foe if we procrastinate.”
Your 30s are also a good time to start exploring investing beyond your employer plan. Diversifying your investing portfolio can help you spread risk across a wide variety of investments and categories.
If your family is growing, you may also consider how purchasing in life insurance can help protect your family financially if anything happens to you. Affeldt also recommends parents create a strategy for college expenses now.
When your children start heading off to college, you’ll find yourself with some room in your budget, possibly for the first time since they were born! This may be a good opportunity to increase the amount you send to your retirement fund as that retirement date is getting closer.
This marks the start of your peak earning years, which is a good time to strengthen your commitment to saving by setting more aside.
Consider converting term life insurance to permanent if other planning is in place and cash flow allows. Using permanent life insurance carefully designed as a financial tool (deeply complex) can be a fit if your income has reached Roth IRA contribution limits or you are maximizing other retirement plans and still have additional cash flow. Hiring a financial advisor is a strong consideration.
Please keep in mind that the primary reason to purchase a life insurance product is the death benefit. Life insurance products contain fees, such as mortality and expense charges (which may increase over time), and may contain restrictions, such as surrender periods.
Now is the time to really consider retirement. Plan to meet with your financial advisor to review what type of retirement you’re hoping for, how much you have in your retirement fund, what your social security benefits will look like and when you will be able to retire realistically based on these factors.
Review your retirement accounts on a regular basis to determine if your savings are on track and if your contributions could be increased. Keep in mind the annual limitations on contributions to 401(k)s—in 2017, $18,000 for those under 50 and $24,000 for those over 50.2
If you have 401(k) plans with past employers, discuss with your advisor on how to best deal with these. Your options include leaving the account where it is, rolling over to your new employer, rolling over to an IRA or taking a cash distribution.
In your 50s, you are entering the second phase of saving: preservation. Fox typically recommends decreasing the amount of risk in your investments at this point. He says, “The clock to retirement is winding down so this is the time to consider decreasing the amount of risk you take with your investments.”
Affeldt typically recommends downsizing your living arrangements at this point and investing proceeds or paying cash for a smaller home. She adds, “Focusing on long term care options will now become front and center; self-funding is not recommended.”
Retirement consists of something different for everyone. Whether you choose to keep working, take on a different or less demanding role at work, spend more time at home with family or spend time volunteering, consider what retirement will look like for you. Reflecting on your options ahead of time can help you more accurately prepare your financial strategy.
North says of this stage in savings, “By this point your lifetime you will have either achieved a critical mass for retirement, or you won’t, requiring part-time income.”
As retirement edges closer, do you know where your money will come from? Consult with your financial advisor to map out where your income will stream from throughout retirement. The most typical sources of income for retirees are social security, pension and retirement plans, employment earnings and interests and dividends from investments.
Throughout the process, work with your advisor to arrive at a budget fit for you. Within your budget, include any upcoming larger items, such as contributing to a grandchild’s college education, as well as increased monthly costs, such as health care and insurance before Medicare kicks in.
Regularly assessing your budget is necessary whether you’re still several years out from retirement, about to retire or well settled into retirement.
Affeldt says, “Planning out the retirement decumulation strategy to be most tax efficient is crucial. The IRA to Roth rollover strategy will be important to consider and monitor annually… Careful social security consideration with your advisor is also essential; delaying to age 70 may mean significantly more income.”
If you feel like you’re behind, you’re not alone. A 2017 study1 showed that a quarter of non-retired Americans had no retirement savings.
If you’re starting late, consider these tips for making the most of your investments:
Our team of professional advisors are experts in retirement planning, including those who specialize in retirement saving for physicians, lawyers, veterinarians, self-employed individuals, small business owners and more.
North Star Resource Group has 150 advisors in 23 states, so you can find one in your area committed to your success. Use our Find an Advisor tool to narrow down by location, professional area of focus, personal interests and more!
1Report on the Economic Well-Being of U.S. Households in 2017. (2018, May). Retrieved June 26, 2019, from https://www.federalreserve.gov/publications/files/2017-report-economic-well-being-us-households-201805.pdf
2IRS Announces 2017 Pension Plan Limitations; 401(k) Contribution Limit Remains Unchanged at $18,000 for 2017. (2016, October 27). Retrieved June 26, 2019, from https://www.irs.gov/newsroom/irs-announces-2017-pension-plan-limitations-401k-contribution-limit-remains-unchanged-at-18000-for-2017