Retirement Planning

It’s Never Too Early to Start

I’m an active participant in several online Q&A forums.  A common question is, “Am I on track for retirement?”  The question gets asked most frequently by people in their 50’s and 60’s; however, some participants in their 30’s and even as early as their 20’s are asking the question.

The bottom line is it’s really never too early to start planning for retirement whether you’re a Boomer, a Gen X’er (like me!) or even a Millennial.  No matter what your age is, here are things you can do now to plan for the kind of retirement you’d like to live.

In Your 20’s & 30’s

If you’re in your 20’s and 30’s, lots can change between now and your retirement years, so in many cases it’s too early to work with a financial advisor on putting together a formal Retirement Plan.  However, there are things you can and should be doing including:

  • Having an Emergency Fund of 3-6 months of living expenses set aside in a separate bank account.
  • Grabbing any company matching contributions offered by your current employer if you’re eligible for a 401(k). You should be saving at least enough to take advantage of this “free” money from your employer.
  • Taking risks off the table that have the possibility of blowing up your long-term finances for you and your family. Make sure you have adequate life insurance and disability insurance in place, particularly if you are starting a family.
  • Developing good, long-term investing habits by investing in a well-diversified, long-term portfolio of stocks, bonds and hard assets like real estate and commodities. Avoid trying to time the market or chase hot stocks or the next hot investment product.

You can also get a good flavor for your retirement preparedness based on the percentage of your income that you are saving.  If you’re in your 20’s and 30’s, consider saving between 10% and 20% of your income.  I’ve done the math that shows most people who get an early start will be fine saving at this rate.

In Your 30’s & 40’s

You’ve now had a decade or two to accumulate assets and your retirement plans should start to be forming.  If you’re just getting started, think about upping that savings percentage to 15-25% of your income to play catch up with those who started earlier.

In addition, if you’ve changed jobs once or several times, you may have one or more old 401(k)’s laying around.  Take the time to open your own IRA and roll these accounts over into it.  You’ll usually have more and better investment options and almost definitely will be able to reduce the fees you are paying.  Even a small difference in fees can make a huge difference in your retirement savings, so take this important step on your own or with the help of a financial advisor.

Speaking of changing careers, retirement planning isn’t just about saving money, it’s also about earning money.  Make sure you are keeping your skills current via continuing education within your current field or learning new skills either by picking up additional certifications or another degree.

Interestingly, people are now sticking with their jobs longer than they did in the 1980’s.  In 1983, workers changed jobs an average of once every 3.5 years as compared to once every 3.7 years in 2002 and a bigger jump to once every 4.6 years in 2012.  Analysts suggest this is due to fewer “good” job opportunities as well as being caused by older workers who have not adequately prepared for retirement and are being forced to work longer.

If you feel like you’re in a career rut, consider a midlife career change to not only boost your income, but also your ability to save for retirement.

In Your 50’s & 60’s

Your retirement picture should now be coming into sharper focus.  Stay diligent with your savings goals and continue to keep money flowing in the door via employment.

You are also now at a point that you can start making more accurate projections of what your retirement finances will look like.  To get started, consider calculating your Retirement Account Multiple (RAM) using the method described in this article.

If you come in with a RAM of less than 7, think about boosting the percentage of your income that you’re saving by 1% a year until you catch up on your savings goals.

And if you come in with a RAM of more than 18, you can probably take your foot off the savings accelerator pedal and spend more on the experiences, people and causes that matter most to you in your life.

Keep in mind that like all rules of thumb, this is only a starting point to know where you really stand with your retirement savings.

If you come in with a RAM of between a 7 and 12 and want more information, consider working with a qualified financial advisor to develop a formal Retirement Plan.  This does 3 things for you.  It:

  • Provides peace of mind in knowing with more certainty that you are on track for retirement.
  • Gives you annual savings goals and spending guidelines and a more concrete date for when you can plan to either partially or fully retire.
  • Offers the assurance that a financial professional has reviewed your specific circumstances, not only in terms of helping you make the most of the savings and investments that you do have, but also by avoiding costly mistakes including the types of things you choose to invest in or how you go about claiming Social Security, among other things.

Your Assignment:

Whether you’re early in your career or starting to think about your second act in life, there’s no time like the present to plan for your retirement.  Taking action now on the suggestions listed above will give you more options to pursue the passions, have the experiences and, perhaps most importantly, have the time to savor important relationships when you do finally decide to retire.

Originally published on Nerdwallet.