For most workers, it can be tempting to push off thinking about retirement, saying, “I’ll worry about that when I’m older.” The reality, however, is that there are steps you can, and should, be taking at every age.
You have two primary resources to take advantage of in order to achieve your retirement goals. The first is your salary; if you are going to retire, you are going to need to save a portion of your salary. Your second resource, and the one more often overlooked, is time. It’s very easy to understand how salary impacts retirement. For most of us, our salaries rise as we get older, and we tend to save larger amounts later in life. Unfortunately, this leads to the thinking that saving for retirement is a chore for later in life, but this ignores HALF of your resources: time!
Think of the tradeoff between your two resources — time and salary — being balanced on a “retirement scale.” On the left arm of your scale you have time, and on the right, your salary. Your goal needs to be to balance the scales, relying not only on your ability to save larger amounts as you get older, but also for time to work to your advantage. You have the option to wait until later on in life, but the longer you wait the lower and lower the salary side of the scale dips, meaning you will need to use more and more of your salary to meet your retirement goals.
Now, we are not recommending that you go bankrupt early in life to fund your retirement, but by committing to saving early and consistently you can balance your scales. You want both of your resources working for you. Balancing your retirement scales decreases the burden on both ends, which eases the pressure on saving for retirement throughout your life.
Ages 20-30
At this point, retirement scales lean heavily to the left, with timing being your best resource to utilize. During this time, people are commonly finishing school and beginning their careers. Salaries are likely low, leading many to believe that this is not the time to save for retirement. This thinking ignores the use of time.
As an example, if you had invested $1 in March of 1970 in the S&P 500, a benchmark for U.S. equities, and reinvested your dividends, that $1 investment would be worth more than $85 today! While past market performance of course doesn’t guarantee future returns, even small retirement savings at this age can have a very big impact. You can save small amounts of salary now or save much more substantial amounts later. Let the left of the scale time work for you.
Considerations for Investing: In this stage, time is on your side for one to absorb any market gains or losses. Most young investors will likely have a heavy allocation toward equities. Working with a financial advisor will help you determine your tolerance for risk and identify your goals. With such a long time horizon, market movements that drastically affect our account balances will become sections in history textbooks once you are actually in retirement.
Ages 30-40
During this time, careers are likely maturing and families may be beginning. In short, more responsibilities are being heaped onto our lives. Retirement scales are beginning to tip, moving away from time and toward salaries. This is a crucial time in your life to begin planning and making decisions that will make your later stages of life easier to navigate. You should be increasing your retirement contributions with any salary increases you get and consolidating any retirement accounts you have had from past jobs to make them easier to manage. Time is still your critical resource in this stage of life.
Considerations for Investing: At this point in your life, and certainly as you move into your late 30s, your account balances may begin to show real growth and you may start feeling the effects of market movements on your overall balance. It’s important to be diversified according to your specific needs and risk tolerance. Most investors likely still have high allocations to equities as retirement is still 20-plus years away.
Ages 40-50
At this point, careers are mature, families are progressing, and we likely have much more stable financial situations. Here, your retirement scales are balanced between time and salary. You still have 15-plus years for time to play a factor and are likely entering some of your highest potential income earning years. These can be prime years to save for retirement while still taking advantage of the time you have left until retirement.
Considerations for Investing: Market movements are likely to cause many people in their 40-50s much discomfort. Our contributions have been increasing throughout our lives, and at this point it’s likely that investment gains or losses, not contributions, will dictate the direction of our account balances. It is important to be diversified in your investments and have an investment plan that you can stick with and follow through market cycles. A poor investment timing decision can have a serious negative impact. You should avoid trying to time the market and stick with a diversified investment plan.
Ages 50-60
Hopefully you are paying off you mortgage, your kids are finishing school and you can begin to look forward to your well-planned retirement. Your retirement scales have now dipped firmly to the right, leaning heavily on salary. It’s still very important to invest in this stage of your life. While you are less than 10 years away from retirement, you are going to be invested through retirement and a portion of your savings still has 20-plus years to be invested, taking advantage of the market’s potential to give returns over cash over long periods of time.
Considerations for Investing: By your 50s, you are an investment veteran. You have seen market movements in your 20s and 30s, and you were able to navigate your 40s with balances large enough for market movements to truly affect you. You understand that markets do not go up in straight lines. Here, you need to be properly diversified between equities and bonds for your own individual risk tolerances, as well as taking into account your investment time horizon. You aren’t at retirement yet, but you can see the light at the end of the tunnel.
Ages 60+
Here you’re at, or very close, to retirement. You can still save for retirement as you are working, using tax-advantaged accounts and especially getting any company match offered through retirement plans. Your retirement scale is now leaning all the way to the right. While you still have some time on your side to be invested, it’s time to enjoy retirement.
Considerations for Investing: As always, your investment allocations should reflect your personal situation at this stage of your life. Your needs and how much you have saved for retirement will determine your diversification. It is extremely important to work with a professional to understand best strategies for distribution or drawing down your retirement accounts to fund the later stages of your life.
NOTE: No investment strategy can guarantee a profit or protect against a loss. All investments carry some level of risk including the potential loss of principal invested. Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market.
Emmett George Dupas III has been with Northwestern Mutual Financial Network of Louisiana since February 2003. He has focused his practice as a wealth management advisor, as well as a retirement plan specialist. Dupas has been recognized as a Top Retirement Plan Advisor by the Financial Times and PLANADVISER Magazine.
Dylan Hoon has been working with Dupas for five years as an investment assistant.
