As Millennials grow older, many of us are concerned about retirement. We know that Social Security is in peril, and most of us do not have jobs that offer pensions as our parents did. It’s growing ever-important for our generation to begin saving for retirement. You don’t want to be left high and dry when you’re too old to work. Here’s what you need to know about planning for your future today.
Make a Retirement Timeline
Before you can start planning for retirement, you need a realistic estimate of your retirement timeline. Your retirement timeline is whatever age you intend to retire minus your current age. If you are young and have several decades of work ahead of you, you can typically take on higher-risk investments like stocks instead of bonds. Over the long term, stocks typically out earn all other forms of investments. However, the keyword here is “long-term,” as in over a decade. If you are in your 50’s and less than ten years away from retirement, stocks are not the best choice for you.
Investments with higher risks and higher rewards are better for young investors because young investors will need to account for inflation. A dollar twenty years ago had more purchasing power than it does now, and probably the same will happen in another twenty years. Younger investors can leverage the time they have to invest against inevitable inflation by choosing higher-risk investments. Stocks with higher volatility can ride out the ups and downs of the market and have high enough returns to keep up with inflation.
Older people creating a retirement fund are better served by focusing on building a portfolio that focuses on income and the preservation of capital. This means building a more conservative investment portfolio. Older investors will want to put their money into securities, such as bonds, that will provide income into retirement. Older investors also do not need to account for inflation as much. The cost of living will not rise as dramatically for the 59-year-old five years away from retirement than the 25-year-old who is several decades away from retirement.
Plan Your Retirement Spending
Many people erroneously assume they will spend only 70% to 80% of what they spent during their working years. This is often not true and sets people up to have insufficient retirement funds. Oftentimes, people spend as much or even more in their retirement as they did during their working years. Without work taking up forty or more hours every week, retirees have more time to travel, go shopping, and enjoy hobbies. All of these cost money.
Expert retirement investors recommend investors plan to spend the same amount or more in their retirement. Especially if the mortgage is not paid off on your house, your expenses will likely remain the same. If you have a medical emergency, that can easily take a large and unexpected chunk of your retirement savings.
And don’t forget your family! You may also want to fund future grandchildren’s education. With some good investments and planning, you can not only provide for yourself in your twilight years, you can also provide for future generations.
Make a Game Plan For Your Financial Goals
Chances are, you also have other financial goals that you have alongside your retirement. Some other financial goals could be:
- Paying off a credit card debt
- Paying off a student loan
- Building an emergency fund
- Saving for a house
- Saving for a child or children’s education
You will need to prioritize. Generally speaking, it is best to first pay off debts, particularly the ones with the highest interest rates first, before you begin saving for other goals. You don’t want to be kneecapped by bad credit in the future.
After you’ve paid off your debts and begin building an emergency fund, that is an ideal time to begin saving for retirement. Ask your employer about retirement plans, many offer retirement plans that match your contribution.
Decide On Investments
Now that you’ve assessed your timeline and retirement needs, it’s time to decide on investments. Again, ask your employer if they offer any matching funds plans for retirement, that is a great place to start. However, not all employers offer a 401K plan, in which case you might want to look into opening an IRA. If you’re young and just starting to dip your toes into stocks, you might find it easier and more intuitive to get started trading stocks through trading apps like many Robinhood alternatives.
Generally speaking, you’ll want to make a diverse portfolio that is more aggressive and high-risk when you’re younger, and more conservative when you are older. Your retirement needs may change over the years as you change jobs and potentially add new members to your family, so you’ll want to revisit your retirement plan every few years or so.
Once you’ve decided on investments, let them grow for a while. They do not require constant monitoring. It is perfectly normal for portfolios to have years when they depreciate in value, only to regain their value and then some the next year. Many investors lose money by panic selling stocks that eventually bounce back, so relax!
Consider Finding a Financial Advisor
If all of this seems like a lot to consider, you may want to find yourself a financial advisor. A financial advisor can help assess your current situation and help you draw up a budget to prioritize your financial goals. If you have a habit of helicoptering over your investments, a financial advisor can help you maintain a perspective about your investments and avoid emotional missteps like panic selling depreciating stocks. A good financial advisor will be able to break down everything into simple actionable items for you.
Saving for retirement may seem like a lofty and far-away goal, but life is short. You’ll want to plan for the future so that you can enjoy your retirement and thrive. Start planning for a happy retirement today!