In the first part of this three part series on saving for retirement at different life stages, we discussed saving strategies for individuals still early in their professional careers. While the principles of compounding and paying yourself first certainly do apply as your career develops and income grows, there are often more complex factors which also need consideration. In the second part of this series, tips for making the most of your peak earning years are discussed.
Peak earning years
The stage of peak earning years usually coincides with starting a family and related expenses, or perhaps a few years after. While you will likely be focused on short term goals, such as purchasing a home or paying for children’s education, take care to avoid sacrificing your retirement contributions in the process. Making a financial plan can be beneficial to help you juggle multiple priorities without derailing your retirement savings.
Thinking of deferring or reducing your contributions for only a couple of years? Remember, there is no loan you can take out for retirement; therefore, consider what alternatives can help you come up with needed funds for other goals. For example, if you are trying to purchase property, explore ways to save for a down payment without dipping into your nest egg. If it is your plan to finance your children’s education, whether it is for private school or college, research loans or scholarships that can help with the costs, so that you can continue with your goal of saving money for retirement.
As your income grows, ensure your retirement contributions are also increasing, taking advantage of any catch-up contributions that are available to individuals over 50. As your investments will have less time to compound, it is even more important to pay yourself first. Work with a financial advisor to ensure you are on track for your desired retirement age and lifestyle. Often, individuals are ill-prepared and wait until their 50s or 60s to seek advice from an advisor. If you haven’t saved enough, but still have 20 years until retirement, there are still likely plenty of options available to get back on track. When the timeframe shrinks to 10 years or less, choices become limited. Do plans really matter? If you stick to them they do. According to a 2015 study by Fidelity, couples with a retirement plan are two times as likely to live comfortably in retirement.
As you refine your plan, pay attention to your asset allocation and ensure enough emphasis is placed on diversification. While it may be advantageous to take on more risk earlier in adulthood, as you will have more time to make up for inevitable market swings, as you age your investment strategy and your time horizon need to be realigned.
As part of your diversification strategy, you may be considering purchasing a second home or income property. As you weigh this strategy, consider if real estate is a better investment than the stock market, based on factors such as your risk preferences, tax situation, and willingness to be a landlord.
As income increases, expenses often follow. While it’s important to enjoy your success, ensure it is within your means and obligations (including retirement). Saving can also be part of your overall tax strategy. Since most retirement plans are tax-advantaged, saving will actually help reduce your taxable income. In the final part of this series, we’ll discuss planning steps for those at the cusp of retirement.
The material contained in this article is for general information only and should not be construed as the rendering of personalized investment, legal, accounting, or tax advice.
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