When it comes to planning for your financial future, try picturing retirement as a mountain. One of those majestic, snow-topped soaring ones.
In your early career, the peaks loom far off on the hazy horizon. By mid-life, you should be well beyond base camp. Late career? Well, ideally you’re nearing the summit.
Skilled mountain climbers need to focus on preparation, pacing and perseverance. It makes sense to take a similar approach to retirement, regardless of what life stage you’re in.
Here’s a guide to help make sure you’re well-equipped, have a clear path to the top, and avoid those falling rocks every step of the way.
So you scored that first real job. For someone just starting a career, chances are that contemplating the end of it likely isn’t high on your list. Yet it should be for one huge reason: Time is on your side.
One of the most important principles that financial experts stress is the power of compound interest. Put simply, your savings—because they earn interest over time—will grow more the sooner you start saving and investing. This is true whether you’re saving in a basic savings account, but can be particularly powerful if you are investing in a 401(k) plan or individual retirement account (IRA).
Consider this: If a 25-year old who invests $100 per month for 40 years in a Roth IRA retirement fund that earns a 6 percent average annual return, that person will have a cool half-million dollars at age 65.
Another issue that’s usually not top-of-mind for early-career professionals—life insurance. Still, there are some compelling arguments for buying life insurance as part of your long-range financial plan. For one thing, life insurance typically costs less when you’re young and healthy. As you get older, the chances increase of developing health issues that could put your ability to get insured affordably at risk.
There are two basic categories of life insurance—term insurance and permanent insurance. Term life insurance provides a death benefit for a specified period of time. Permanent life insurance also offers a death benefit, and often some other long-term savings features, but without the time restriction.
Because permanent policies tend to cost more, younger people often opt for term insurance. If you go that route, look for a term life insurance policy that offers convertibility, meaning the full policy, or a fraction of it, can later be converted to permanent life insurance. This move can keep your options open to switch to a different type of life insurance that as you get older might be more beneficial as part of your overall retirement planning strategy.
Mid-career can be challenging on the financial front. A slew of major investments and expenses can crash down on you all at once: home ownership, vehicles, children, and the endless costs of running a household. Combine that with lingering student loan debt and it can feel like a crunch for many.
Yet, it’s crucial that your retirement savings continue and even ramp up at this stage. During mid-career you can still reap some benefits of compounding interest as well as a more aggressive investment strategy. This is also the stage when it makes sense to consider tapping the expertise of a trusted financial advisor who can provide guidance to help ensure your portfolio is properly balanced and you’re on track to hit your financial retirement goals.
Life insurance also grows in importance during this stage of your life, particularly if you have a family that relies on your income. A solid life insurance plan will protect your family should something happen to you, without forcing them to raid your retirement funds.
As you enter the later stages of your career, your focus on retirement planning should intensify. If you’re behind in your savings, there a way to get back on track.
If you are over the age of 50, the IRS permits you to make catch-up contributions to your retirement accounts. For 401(k) plans, you can put in an additional $6,000 beyond the standard $19,000 limit. For IRAs, you can invest an additional $1,000 beyond the $6,000 limit.
Further, you likely want to be sure that you are adjusting the mix of your investments to ensure that a swift downturn in the stock market doesn’t hammer your savings without providing enough time for you to recover.
While past generations often viewed Social Security as the cornerstone of their retirement income, that mindset is fading fast. As people live longer, retirement planning has changed. While the Social Security Administration defines full retirement age at 66— the time when you’re eligible to withdraw the full amount of your Social Security benefits—you may need financial security for decades after that. Consider that adults over 85 are the fastest growing segment of the population, according to AARP.
For those in late career, experts emphasize the importance of viewing life insurance policy as part of your overall retirement portfolio — a piece that is not subject to the vagaries of the stock or bond markets.
For instance, you may be able to convert a life insurance plan you purchased at an early stage to meet the evolving needs of you and your spouse
Planning for retirement can indeed feel like a trek up a mountain. Yet wherever you are on your journey, if you take action and stay focused you can be sure to enjoy the view, both now and when you reach that summit.