One size fits all might work for a t-shirt giveaway at a baseball game, but it’s a poor mindset for retirement saving. Not only does everyone have a different goal and time horizon for retirement, but the process for reaching these goals needs constant tweaking. For example, jumping headfirst into a portfolio of 100% stocks isn’t bad advice for a 25-year old, but it’s terrible advice for a 65-year old.

You don’t have the same risk tolerance and timeline across every stage of your life, so your financial plan needs to be adaptable as you age, grow, and begin taking in more income. Chopping up your life into sections is a good way to map out your long-term goals we’ll look at a few ways to get started.

Early Career Years

Remember what it was like entering the job market for the first time after college? Maybe you were lucky enough to score a high salary (if you knew the right people), but for most of us, it was a job on the bottom of the totem pole with an entry-level salary. If you had college debt to deal with as well, you likely wondered why you should save for retirement when you had other obligations to attend to.

However, the early years of your career are actually the ideal time to start saving for retirement, even if you don’t come close to maxing out your 401(k) or IRA. When it comes to saving, it’s not prudent stock picking or perfect market timing that reaps the most benefits – it’s a long time horizon. Young people have time as an ally in their retirement goals, which means early investments can be close to 100% in stocks without worrying about a market crash. In fact, young workers might as well be hoping for a market crash so they can make their first stock purchases at a discount and let compound interest go to work over multiple decades.

Prime Earning Years

Sometimes it takes a while for a career to take shape. Maybe the ideal job you fantasized about in college turns out to be a total nightmare in real life, so you change careers. It’s not unusual for young people to spend their 20s finding their way on their career path and not establishing themselves until their 30s. However, once you settle into a career and start working your way up the income ladder, it’s time to reconsider your investment thesis.

Employees in their prime earning years should still have a hefty allocation to stocks, but you must consider your risk tolerance as well as your timeline. Prime earners should be maxing out their tax-deferred retirement accounts and building a strong portfolio with their increased income.

But as your nest egg accumulates, your risk tolerance may change. It’s not hard to go 100% into stocks when you’re in your 20s and only need 5 digits to count your savings. However, those gyrations in equity markets can be too much to handle when your savings are larger and your timeframe shorter. This is the perfect time to consider adding some bonds or dividend-paying stocks to your allocation in order to reduce the risk of your portfolio. Now isn’t the time to blindly buy investments – you need a strategy.

Approaching Retirement

Once you hit age 50, you can begin to put your catch-up contributions into your 401(k) and IRA accounts. Adding these extra funds creates additional tax advantages, but your goal at this point isn’t wealth accumulation. Once you begin to approach retirement age, you’ll need to reduce the risk in your portfolio and begin to think about how to most efficiently spend down your nest egg.

At this stage in your life, your allocation should be closer to 50/50 in stocks and bonds. You should also begin to think about the most tax efficient way to draw down your accounts and make sure your assets are in their ideal vehicle. For example, a Roth IRA faces no tax or penalties once the owner reaches age 59.5, so these accounts are great for income-producing dividend stocks. Capital gains don’t get the strict tax treatment of dividends, so growth investments like tech stocks make sense in an account like a traditional 401(k) where taxes must be paid at withdrawal. Assets like municipal bonds aren’t subject to federal taxes, so keeping them in a taxable account is just fine.

Retirement nest eggs have two main enemies: taxes and inflation. There’s not much you can do about inflation other than spending less, but tax planning is a crucial component of any retirement plan. Whenever you enter a new stage of your saving lifecycle, consult with your financial advisor and make sure the path toward your goals is still clear.

Work With an Experienced Financial Advisor

Our knowledgeable financial advisors at Good Life Financial Advisors of Mt. Pleasant are here to help you invest at any stage in your life. We can provide the tools and guidance to help you plan your estate’s finances for your family’s future. Contact us today to speak to our consultants.

Disclosures

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.

No strategy assures success or protects against loss.

Stock investing includes risks, including fluctuating prices and loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.