Retirement planning will be one of the most important components of your overall financial plan. Whether you have just started your first job, are starting a family, are enjoying your peak earning years, or are preparing to retire, your employer-sponsored retirement plan will play a primary role in your overall financial plan.
If you’re a young adult just starting your first job, you are probably facing a number of financial challenges. College loans, rent, and car payments are all competing for your hard-earned entry-level paycheck. How can you even consider setting aside money in your employer-sponsored retirement plan? The decades ahead of you can be your greatest advantage, through the power of compounding. Over time, the process can snowball.
EXAMPLE(S): Say at age 20, you begin investing $3,000 each year for retirement. At age 65, you would have invested $135,000. If you assume a 6% average annual return, you would have accumulated a total of $638,231 by age 65. However, if you wait until age 45 to begin investing that $3,000 annually and earn the same 6% return, by age 65 you would have invested $60,000 and accumulated a total $110,357.
STARTING A FAMILY
You will have even more obligations when you marry and start a family. Mortgage payments, higher grocery and gas bills, child-care and activities expenses, family vacations, college savings, home repairs and maintenance, and health-care costs. At this stage of life, the list of monthly expenses seems endless. If you think you might take a break from work to raise a family, consider temporarily increasing your plan contributions before you leave and after you return to help make up for the lost time and savings. Or perhaps your spouse could increase his or her contributions while you take time off. Although it can be tempting to cut your retirement savings plan contributions to make ends meet, do your best to resist temptation and stay diligent. Your retirement needs to be a high priority.
YOUR PEAK EARNING YEARS
This stage of your career can bring a wide variety of challenges and opportunities. On the other hand, with 20+ years of work experience behind you, you could be reaping the benefits of the highest salary you’ve ever earned. With more income at your disposal, now may be an ideal time to kick your retirement savings plan into high gear. If you’re age 50 or older, you may be able to take advantage of catch-up contributions, which allow you to contribute up to $24,000 to your employer-sponsored plan in 2016, versus a maximum of $18,000 for most everyone else. (Some plans impose different limits.)
In addition, if you haven’t yet met with a financial professional, now may be a good time to do so. A financial professional can help you refine your savings goal and investment allocations, as well as help you plan ahead for the next stage.
PREPARING TO RETIRE
With just a few short years until you celebrate the major step into retirement, it’s time to begin thinking about when and how you will begin drawing down your retirement plan assets. You might also want to adjust your investment allocations with an eye towards asset protection (although it’s still important to pursue a bit of growth to keep up with the rising cost of living). A financial professional can become a very important ally in helping to address the various decisions you will face at this important juncture.
You may want to discuss health care needs and costs, as well as retiree health insurance, how to afford needs, wants, and wishes. Will you need to supplement income from part-time work or other resources?
As you make decisions about your plan on the road to retirement, be sure to review it alongside your other savings and investment strategies. While it’s generally not advisable to make frequent changes in your retirement plan investment mix, you will want to review your plan’s portfolio, at least once each year, and as major events (e.g., marriage, divorce, birth of a child, job change) occur throughout your life.
All examples are hypothetical and not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing
Sandy Derby, CFP®, ChFC LPL Financial Advisor, VP Southwest Michigan Region 5003 Century Ave Kalamazoo, MI 49006 269-459-0474 TM
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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