Retirement Planning: Key Considerations for Every Decade
Retirement planning is a lifelong pursuit — if you want to succeed at it, that is. While retirement can often seem a long way away, delaying gratification can pay huge rewards.
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Making sacrifices throughout your working career is an important step, but to optimize your retirement plan, you’ll want to make adjustments to it along the way. When you’re just starting out in your 20s, you should have a completely different approach to retirement planning than when you are in your 60s, for example.
Here’s how you should look at retirement planning during each decade of your life, including the key considerations to keep in mind.
In Your 20s: Start Early, Build a Foundation
Retirement planning in your 20s can admittedly be difficult. Not only does retirement seem a literal lifetime away, but you’re generally still learning how to manage your finances in your 20s. Add the fact that you’re usually earning the smallest paychecks of your career in your 20s and it can be difficult to consistently set aside money for your future self.
However, starting to save for retirement as early as possible is the single best way to ensure that you’ll have a solid account balance by the time you reach your 60s. This is because compound interest works best over long periods of time — and the effects can be dramatic.
Here’s an example. Imagine you invest just $200 per month starting at age 21, and you earn an average 8% annual return until you are 65. At that point, your account balance will be just under $1 million, at about $971,000. But if you wait until you are 29, just eight years later, your balance will only reach $499,344. That’s roughly half as much as if you started at a younger age.
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In Your 30s: Maximize Your Plan
Once you’ve started your retirement plan in your 20s, you can build on it in your 30s. You’ll likely be earning a larger paycheck in your 30s, and you’ll have more experience both with managing your daily budget and with investing successfully.
If you’re already in the practice of contributing to your 401(k) or other retirement plans — as you should be — now’s the time to start bumping up your contribution rate. If you’re used to setting aside 10% of your paycheck, for example, move that up to 15%. Every time your income increases, get in the habit of putting that money towards your retirement plan first, rather than succumbing to “lifestyle creep” and spending it all on discretionary items, otherwise known as “wants.”
In Your 40s: Run a Midpoint Check-In & Recalibrate Your Plan
When you’re in your 40s, you’re in a great position to look forward and look back. By now, you’ve hopefully been saving for retirement for 20 or more years, so you’ve likely learned a lot in terms of how to manage your budget, how to consistently make retirement plan contributions and how to successfully pick investments. Take all of that knowledge and apply it to the next 20 years of your retirement plan by making appropriate tweaks.
Ensure that you’re getting all of the advantages offered by your company’s retirement plan, including matching contributions and any additional bonus contributions. Check on any equity compensation plans you may participate in and see how they mesh with the investments you’ve selected for your retirement plan. And be sure to continue making contributions even though your expenses are likely piling up, perhaps in the form of a home mortgage, auto loans, educational costs and consumer debt like credit cards.
In Your 50s: Use Catch-Up Contributions, Take Advantage of Your Peak Earnings Years
Once you turn 50, the IRS grants all taxpayers a retirement planning gift in the form of catch-up contributions. Rather than contributing $7,000 to an IRA, for example, you can kick in an additional $1,000, for a total of $8,000.
Things are even better if you have a 401(k) plan, where the catch-up contribution amounts to $7,500, making the maximum contribution a whopping $30,500. As you’re likely in your peak earning years in your 50s, this is a great time to take advantage of these generous contribution limits.
In Your 60s: Direct Your Plan Toward Your Retirement Lifestyle
In your 60s, your retirement planning is near an end. Soon, you will have to shift your focus from accumulation to distribution, and you should adjust your retirement planning as a result.
You might consider downshifting the risk you’re taking in your portfolio, as the last thing anyone wants is to suffer a 30% drawdown in their investment portfolio right before they retire and lose their regular source of income. Be sure that you have all of the financial basics in place, from a sufficient emergency fund to insurance and care plans. Start planning a realistic retirement spending budget and see if you have adequate funds to cover your ideal lifestyle.
Lastly, start thinking about your Social Security claiming strategy, and how it will work in conjunction with the income you’ll draw from your retirement plan.
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This article originally appeared on GOBankingRates.com: Retirement Planning: Key Considerations for Every Decade
