The 60’s rock band The Byrds had a huge hit that opens with “To every thing there is a season, and a time to every purpose under the heaven” which is lifted straight out of the book of Ecclesiastes and as far as I know they have never been sued for plagiarism. Lyric litigation aside, The Byrds and the Bible were both offering some of the most sound retirement planning advice ever.
The unfortunate flip-side of that same advice is the path most people take for retirement. That common path is not worrying about retirement until retirement is in sight and then making a mad rush to accumulate enough money. Of course waiting until you are in your mid-fifties can make accumulating a meaningful nest egg a challenge.
(Note to my fellow 50 somethings – While the last sentence may apply to you it is not to suggest that you through up your hands and concede defeat. Keep reading there’s good news further down.)
Reality Check
Twenty-somethings that are sniggering at my comments to the old people should pay careful attention here. Life expectancies are on the rise and people are living considerably longer than ever before and the trend is expected to continue.
Fun Fact – The average 25 year old can expect to live to age 77 and the average 70 year old can expect to live to age 84!
Ain’t actuarial science a hoot! The older you are, the longer you can expect to live. That means that the reality for twenty-somethings saving for twelve years of retirement (65 + 12) are not understanding the fact that if you make it to 70 you get a bonus of seven years added on at the end. And the really great news (bad if you don’t plan on saving enough) is that you can expect that number to go even higher.
Planning for retirement is not a monolithic undertaking for one very simple reason: life is not monolithic. Since this article is addressed to everyone and not anyone in particular it is divided by decades. Even this is an imperfect way to plan because some of us are done having children by the time we’re thirty and some won’t have a child until they’re forty and some will choose to not have children at all. But it gives a good framework for us all to consider.
Twenties
Whether you’re fresh out of college at 22-23 or have been working full-time since high school graduation, anything you save in this decade will yield the greatest return. That means if you put away $6,000 at 22 years old and it grows at a very conservative 5%, by age 65 you will have $51,279.58 in the bank. $6,000 is a magic sort of number because if you put away that much every year starting at age twenty you will have at least $1 million dollars when you retire.
Is $6,000 a year a realistic amount for a twenty-something to save every year? It depends. That’s the best answer I can honestly give anyone. However, you should be saving every penny you can and investing the majority of it the highest earning vehicle (investment talk) you can. The reason is simple higher earnings mean greater risk but you’re in your twenties so you can afford it. You are on the RISK side of the risk-reward paradigm. This means your investments have plenty of time to recover from any temporary down turns.
Thirties
Chances are that during this decade you will have gotten married (maybe twice) had a child or two and are into a comfortable career path. This decade and the next are going to be the most stable of your working life. Statistically you are more likely to remain with your employer longer and your earnings are on a stable upward trajectory.
Related Article: 5 Ways You Could Be Sabotaging Your Retirement
Now is the time to start trying to make up for any years during your twenties when you weren’t able to save very much. Make it a goal to max out your contributions. A significant advantage of employment stability in this decade is vesting. For those whose jobs offer a 401(k) that provide matching contributions that become vested (permanent) after 5 years. That means literally twice the bang for your buck. Make every effort possible to take maximum advantage of this potential windfall.
Forties
This is your decade. These are your peak earning years. Most aspects of your life are most stable right now. Your expenses are also more stable now than they were in your twenties and thirties. You’re more likely to stay in the home you’re in for 10 years or more and with the exception of early mid-life crisis sports cars, your penchant for extravagances is less.
Now is the time to save like crazy. Get every penny of matching retirement contributions and contribute as much as you can to your IRA. Keeping the risk level of your investments fairly aggressive continues to be a fairly safe bet because you are still at least 10-15 years away from retirement which is more than enough to recover from downturns.
Fifties
The kids are grown or almost grown (in most cases) and your earnings are at the highest level they will ever be. Your expenses are actually starting to go down, mortgages are getting close to paid off, the kids are out of the house or will be soon and you’ve made most of your significant life purchases.
This decade affords you the opportunity to look at the household books and take money that is now surplus and stick it in your retirement accounts. You can start to downshift your investment strategy into less risky, lower return investments that offer greater stability and liquidity. You can also catch up by saving more – contribution limits are higher for those 50+.
Related Article: By the Numbers: 2014 Retirement Plan Contribution Limits
Sixties
You’re there! Whether you plan to retire at 62 or 65 or 70, it’s all a coast from here. Save your surplus and limit your risk exposure and get ready for the next quarter century of yelling at the neighbor’s kids and telling anyone that will listen that back in your day people didn’t dress like that!
Beyond
Personally, my retirement plan does not include retirement. The joy of doing what I do (write stuff like this for you unappreciative kids) is something I can do until I’m dead and I fully plan on continuing but I am saving just in case I change my mind. If you are like me, you still will probably want a retirement nest egg to give you a little more freedom in your golden years or deal with the unexpected (like rising medical costs).
Photo Credit: rhome_music