Retirement Saving Strategies for Every Age
Every life stage comes with different built-in challenges and opportunities for long-term saving and investing. Here's how to scale your expectations and habits from your first job to your golden years.
First job and first retirement account. A young doctor recently contacted Clint Pelfrey, president and chief compliance officer of Prosperity Capital Advisors, a Cleveland, Ohio-based investment management firm. Faced with crushing student loans, the costs of starting a practice and the responsibilities of a new family, the doctor wanted to know how to get a grip on retirement saving. Pelfrey set up a long-term plan to accommodate the doctor's current financial pressures while focusing on her financial future.
"You don't want to react to short-term events in the market when you have a long horizon," Pelfrey says.
The temptation for millennials starting their first jobs is to spend those paychecks on cars, trips, furniture and, of course, student loan payments. Retirement saving needs to be just as locked in as those loan repayments. This is also the time to set up a 401(k) and other employer-sponsored saving plans and get in the habit of paying yourself first, financial advisors say. The more ingrained this habit becomes, the harder it will be to break later.
As you advance in your career, you'll have more opportunities for promotions and business ownership, both of which offer enhanced earning possibilities. But in your 20s, your main chance to increase your income comes through freelancing or taking on a second part-time job.
If you do, channel that extra money to simultaneously pay off debt and build savings. Paring debt, advisors say, minimizes the amount you'll end up paying in interest. On the flip side, let your investment earnings compound.
Compound interest is your secret weapon at this point, says Jack Popovich, associate professor in finance at Columbus State Community College. "For every dollar you don't put into savings in your 20s, you lose 10 in retirement," Popovich says. "For every dollar you don't put into savings in your 30s, you lose five in retirement."
Another habit to develop in your 20s, says Edith Strickland, professor of accounting and business for Tallahassee Community College in Florida: Establish an emergency fund, even if you're only contributing $25 a week to save for car repairs or moving expenses. "If you're not building an emergency account, you're liable to fall into a hole" when that inevitable emergency arises, Strickland points out.
New life partner and new household. Combining resources with a life partner can be exciting: double the income and double the fun.
Not so fast, Pelfrey says. Resist the urge to spend to the maximum of your combined incomes. You don't want to get stuck in commitments such as outsized mortgages you can't afford if one of you loses a job.
This is the time to take a step back and understand your financial values and habits, advisors say. Pelfrey advises jointly paying the bills and making investment decisions so each of you are familiar with all accounts, contacts and passwords. "It's a big relationship builder because it helps you invest in the shared future," he says.
Typically, each partner brings both financial strengths and weaknesses. The trick is to make the most of your combined strengths and avoid your shared weaknesses -- without judging or criticizing. Financial advisors point out that money is often a flash point. Navigate these tricky conversations, and you will establish good habits for discussing other difficult topics as well.
Little kids and big bills. "Now, you have responsibilities, and the first thing to do is get term life insurance on both parents," Strickland emphasizes. "Don't just get insurance on the primary earner, because the home services provided by the secondary earner, such as childcare, would have to be replaced if something happened."
Strickland usually advises students to first pay for insurance, then contribute to retirement savings and then to college savings. That's a lot, so she recommends young parents expect to retire between ages 65 and 70, not at or before 65, as their parents did.
Empty nest and retirement in sight. Paying for college while doubling down on retirement savings can be grueling, Popovich says. As your children graduate, resist the temptation to splurge with the "bonus" you get when you are no longer paying for college expenses.
Buy some professional perspective by reviewing your estate and retirement plans with a lawyer and financial planner, respectively. Your expectations need to shift from not only saving efficiently, but also living and spending efficiently in retirement. That may mean adjusting your portfolio for great tax advantages, Popovich says.
And as your own parents increasingly need your help with their daily financial management and keeping their estate plans up to date, you can learn how to do the same. "Help your parents make their plans, and learn how to do yours at the same time," Popovich says. "Make it easy on your heirs."
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