No matter how old you are, retirement planning can be crucial to your overall financial health. However, your current stage of life can make a big difference in how you plan for retirement. Here are some general guidelines:
The early years: If you're just starting your career, chances are you'll have other financial priorities besides retirement savings, such as paying off college loans, your monthly rent, and car payments. But that doesn't mean you should move retirement planning completely off your agenda. For instance, if your company offers a 401(k) plan, try to defer as much salary as possible, especially if your employer will match some of your contributions.
While it may be hard to see from this vantage point, the long-term benefits of tax-deferred compounding within a retirement account such as a 401(k) or an IRA can be substantial. Suppose you contribute $10,000 a year to your 401(k), including matching contributions, beginning with the first year you enter the workforce. Then assume you earn a 7% annual return on your investments in the account. After 40 years you will have accumulated $2,136,096 without paying a penny of tax! (You will be taxed when you withdraw that money during retirement.)
Marriage and family: For many people, the next stage of life involves getting married and starting a family. On top of those financial pressures, you may buy a house and then replace it later with a bigger place. Suffice to say, your regular salary could be stretched thin, plus you have to think about paying for the college education of your children.
The trick at this stage is to stay the course as well as you can. Even if you and your spouse both have been working, one now may take some time off or cut back to part-time to help raise the kids. But you still can find a way to save money for retirement. For example, if you've both been contributing a total of $10,000 a year to a 401(k) and one of you stops working full-time, the other might try to boost 401(k) contributions to make up part of the difference.
Peak earning years: If you're a working couple, the next stage of life might offer a little more flexibility. Although you'll probably be paying for college, the mortgage may be paid off, or close to it, and your salary typically still will be rising. It only makes sense that you should be able to save more for retirement when you're earning the most.
Because even the best-laid plans can go astray, however, you now may need to make up for some lean years when other financial concerns took precedence. For example, if you failed to reach your target for annual 401(k) contributions while one of you was out of the workforce, hiking contributions could help make up lost ground. Even though deferrals to a 401(k) are limited by law ($18,500 for 2018), once you turn 50 you're allowed to make extra annual catch–up contributions ($6,000 for 2018). These also could be years when you move part of your portfolio into slightly riskier investments in the hope of earning higher returns.
Approaching retirement: Once you're in the home stretch, don't hold back. Making maximum contributions to your 401(k) now only makes sense. This is also the time to review your overall financial situation with an eye toward retirement.
For instance, you can tweak plans for sustaining a comfortable retirement, based on the health status of your family, whether you'll be downsizing to a smaller home, the income tax ramifications of your investments, your retirement accounts, and your estate plan. Furthermore, you might consider adjusting your portfolio to emphasize asset protection as well as growth.
Now also would be a good time to get familiar with the rules for required minimum distributions (RMDs). Generally, you have to start taking RMDs from your 401(k) and IRAs after you turn age 70½.
Finally, think about other possible financial moves, such as converting some or all of your IRA funds into a Roth IRA, whose future payouts would be tax-free—you'll be taxed now on the amount you convert. Also try to prepare for current or future financial or health problems affecting your lives. Of course, family-related events such as divorces, weddings, births, and deaths also may have an impact on your retirement picture.
What's your stage right now? With professional assistance, you can develop a plan tailor-made for you and your family.
This article was written by a professional financial journalist for McCarthy Asset Management, Inc and is not intended as legal or investment advice.