When people ask me about the most important investing advice for a successful retirement, the answer is always, “it depends.” Not just because everyone has different financial situations and goals, but also because your phase of life impacts what you should be considering.
If you’re just starting out in your career…
If you’re new to the workforce or are still under 30, the most important thing you can do is simple: start saving! Evaluate your spending and create a budget to set aside money for your future. Saving 15% of your earnings is a good benchmark goal to make sure you’ll be able to replace your earnings when you retire. Be sure to take advantage of matching contributions from your employer, which can make it easier to reach that 15% goal. And don’t panic if you aren’t an investing expert yet. It takes time to learn the nuances of investing. Direct your savings into a retirement plan, most likely one offered through your employer, and let someone else take care of the management for you.
If you’re in the middle of your career…
When you’re in your prime earning years, it’s time to pay more attention to your investment allocations, depending how long you’re planning to work and what you might be saving for (college expenses, a new home, etc.). You’ll want to make use of your advisor and other resources to identify the asset allocations that best align with your goals and risk tolerance. Remember, you’re in the phase of life where it’s important to start protecting what you have in addition to looking for investment growth. You’ll also want to make sure you are providing for your future health coverage needs. Your advisor can point you towards options like a Health Savings Account (HSA) that can enable you to essentially pre-pay for some of your future medical expenses to protect the assets that you’ve built.
As you approach retirement…
As you get closer to your retirement years, you want to focus on what your income needs will be when you retire. This includes where you plan to live, what sort of lifestyle you plan to lead (for example, are you someone that wants to travel the world, or are you happy closer to home?), and whether you are looking to pass down assets to future generations.
You’ll need to determine a “decumulation” plan with your advisor that takes into account your different assets and the order in which you will be tapping into them. Many people aren’t aware that delaying claiming your Social Security by just one year results in an additional 8% per year in benefits being paid out for the rest of your life. How you start drawing from your retirement assets can have a big impact on your tax burden and how much income you’ll have in retirement.
Okay, but what if I’m interested in early retirement?
More and more Americans are interested in early retirement, but it takes a lot of planning and some sacrificing to get there. Early retirement can be a good idea and a possibility for those who are focused on saving and have other passions they want to pursue before traditional retirement age. It’s not easy, though. When you retire early, you essentially give up some of your highest earning years and instead start living on your savings. This tradeoff has a much bigger impact than the average person realizes, so you must start early and be dedicated to saving aggressively in order to retire early. You also must think about how you will cover medical expenses until you become eligible for Medicare at age 65, as well the best time to take Social Security to maximize your income in retirement.
Remember, saving is the key: if you don’t save enough, we can’t invest you to retirement. But if you save appropriately, you may be able to get there in any investment environment.