Time horizons and life stages have a profound impact on your ability to save for retirement and the rewards you can expect. Making the most of the time horizon you have is a key component of effective retirement planning.
Retirement strategies work best with long time horizons. This allows individuals to leverage the benefits of compound interest, which have tremendously high yields over an extended period, and take on a more aggressive investment strategy that balances out risks over the course of several years. These reasons alone are plenty of incentive to get started saving early on, but you shouldn’t be dissuaded from taking advantage of compounding and the other benefits of retirement by
To leverage this long game, you would need to tailor your savings and investment strategy for retirement according to your current life stage and status. Your ideal strategy is determined by a broad assortment of factors, with age and income being among the biggest of them.A financial planning consultant can help you optimize your retirement plan strategy across all stages of your life.
Take advantage of a larger time horizon by investing as early as you can. The best time to invest was yesterday, with the second-best time being today. Young people have a considerable time horizon and even conservative strategies can yield them immense future returns on compounding alone, which is just as well because many young people are often on starter incomes and cannot always afford to put away too large of a chunk of their money on riskier investments. Once you can afford them, however, you have the advantage of being able to weather through the curveballs of higher-risk investments through time.
As you grow older, your income usually grows but your time horizon begins to shrink. One of the biggest disadvantages to preparing for retirement so close to retirement age is the minimized ability to use time horizons. Although you can and should still use compounding to bolster your investments, the strategy you choose in your late 40s would be much more conservative than the ones you had in your mid-20s due to your differing risk profile.
Thus, your strategy must constantly shift to accommodate how much of your income you can afford to invest. To achieve a decent outcome if you start late, you may need to ramp up the amount you need to save and direct to your investments and retirement funds, which is usually feasible if your income grew in the interim.
The Balancing Act
Your savings and investments must come from a portion of your budget, which should also be parceled out to various other key financial security measures such as emergency funds for unexpected disasters, life insurance, college education funds for your children. While still starting out, you can begin by saving at least ten percent of your income, which can grow up to twenty as your income grows.
Meanwhile, as you grow older, the percentage of your income that goes to your investments should also grow, especially in the closing years of your retirement after your children have already graduated. As you approach your golden years, you would need to analyze your projected income to ensure that you do not outlive your nest egg. Set a budget of how much you can withdraw annually (typically no more than 4.5 percent) and adjust as needed.
All this is referring to general terms, of course. Your individual strategy may need to take into account other individual peculiarities based on your current financial standing. The insights provided by a good consultant can help you make informed choices on your investment strategies and open up a new high yield, tax-efficient funds to make the most of the compound interest you have gained over the past few years.