When is the best time to save for retirement? We all tend to worry less about events that are further away. This is natural and usually makes sense. The more immediate and pressing concern is, the sooner we know we must take action. Current financial obligations and needs naturally take precedence.
As we get older, and retirement looms closer, we tend to pay more attention to it. Individual opinions vary when deciding when to save for retirement. The short answer is: The best time to save for retirement is now, whether you are 20 or 60. But the best investment strategy depends on your current age and other factors.
Different Asset Classes
There are a variety of retirement savings investments with different amounts of risk associated and differing potential for return. Some of these are:
- Cash and Cash Equivalents
- Real Estate
- Futures and other Derivatives
In Your 20s or Early On
Generally speaking, the higher the risk involved in an investment, the greater the potential reward. Younger investors tend to have less free capital available but can tolerate greater risk, due to their length of time until retirement. Some people, however, prefer small but consistent gains. Others would rather risk more with the possibility of gaining more. Still, there are general rules that apply. As you get closer and closer to retirement age, with a growing and sizable nest egg, it is usually best to become more conservative. An essential first step before investing is to have 6 to 12 months of income in readily accessible savings or money market account as an emergency fund.
Risk is mitigated by diversifying your investment portfolio. Stocks, for example, are higher-risk investments, especially in uncertain times. By the same token, the potential for gain is higher. Bonds, on the other hand, are fixed, conservative investments which usually vary inversely against the stock market. Cash and cash equivalents are conservative, as well. Real estate is not quite as conservative or as liquid but usually increases in value. There are also tax breaks available that should make investing in a qualified retirement plan a very attractive option in almost all scenarios.
30s, 40s, and Later
So, in your 20s and 30s, you might want to follow a more aggressive strategy, with a higher percentage of your funds in stocks or higher risk investments and a lesser percentage in bonds or cash equivalents. As retirement grows closer, a shift from higher risk to more conservative investments is prudent in order to ensure the safety of your funds. Investopedia, for example, recommends a gradual shift from 80% to 90% stock allocation, 10% to 20% bond allocation in your 20s to a close-to-even split between these two assets by your 50s and 60s. That is certainly the correct general idea, but economic conditions, other potential investments, and/or asset allocations should be taken into consideration as well.
Risk and Gain
The general principle is one that tolerates higher risk for greater reward when retirement is far away and less risk as retirement comes closer and the actuality of needing those funds looms larger. But investment is complex. That's just the general principle. It's important to realize that your retirement savings financial decisions don't occur in a vacuum.
Instead, they should be part of an overall strategic plan that includes your individual current specific needs, your retirement needs, and eventually the transfer of wealth to your heirs. When to save for retirement? Now.
At Chandler & Knowles CPAs, we utilize our tax planning and financial expertise, featuring the Lifetime Economic Acceleration Process (LEAP), to help tailor an individual program to suit your retirement investment needs. Contact Chandler & Knowles CPAs today to begin to chart a financial course that ensures your future!