Why It Is Never Too Early to Save for Retirement
When it comes to a successful retirement, there are several secret ingredients that most retirees wish they had known sooner.
For most young Americans, the pursuit of retirement is self-sacrificing, and often goes hand in hand with an austere feeling from the compromise in lifestyle and spending habits that must take place. Consequently, the next generation faulters on a sense of urgency to prioritize, organize, and map out an event that is set 30 years into the future. When left to their own devices, the future is uncertain and the end is always near, so why bother opening the doors to retirement now?
There are two investment principles that hold true: people in their 20s and 30s have a longer time horizon to retirement and can withstand more risk in exchange for greater returns. On the flipside of the same coin, millennials and Gen Z professionals are stuck in what is formally known as the asset accumulation phase of the retirement lifecycle. Within this stage, other short to medium term financial goals often supersede the long term, and earnings have not yet reached an inflection point. Household debt is usually at its peak, and younger generations still need to acquire things like new cars, a house, starting a family, or maybe just the next iteration of digital currency.
If you find yourself in this stage of life, we suggest you start by defining your vision for an ideal retirement. Brainstorm questions like, what do I want to do in retirement? How much do I want to spend? What are my expectations and concerns? And so on. Next, create a budget and compare your income and expenses. This will allow you to find out your propensity to save each month. Review your current assets and liabilities so that you have a snapshot of your complete financial picture. After that, connect with an advisor to share these goals. Your advisor can help you formulate a plan to make progress towards your goals and talk about the ways you can stick with it. While the plan may change as your own life changes, you will understand each day exactly what you need to contribute, for how long, and which accounts will optimize these savings so that you can reach any short-, medium-, or long-term goal with peace of mind and flexibility.
You may also be concerned with how to navigate the technical components of investing. Concepts such as the quality of investments, diversifying among asset classes, and where to find the best performance are intimidating factors to consider. They are important and should be substantiated with the help of a financial professional, however, it is not as much of a roadblock as it seems. The reason being is because time is a luxury few can afford. Stated differently, it can also be viewed as the biggest advantage young people possess. Time gives retirement savers more chances to make smaller contributions, utilize employer benefits such as a 401(k) for longer, and participate in compounding returns for an extended duration. Work with an advisor to better understand the resources, tools, and benefits at your disposal and whether it is in your best interest to enroll or not.
You might then ask yourself, “Now that my savings plan is in place, what happens next?” In the best example, it is analogous to a trip to the mechanic, except not as mundane when we translate it into portfolio management terms.
Let’s say you own a car. Your car has many parts that work together to get you point A to point B. After enough time, some of the parts, such as your carbonator, will likely break down. Luckily, you will hire a mechanic for either a temporary fix or a new part altogether. There are many carbonators that would work, but your mechanic tells you exactly the one you need based on the car you have, how you drive the car, and other factors like cost, performance, or lifespan. Good mechanics understand your needs, take time to explain why their carbonator works best for your situation, and might even encourage you to come back if you are not totally satisfied.
Your retirement accounts essentially work the same. Business cycles, economic conditions, and unique changes to your own life inevitably alter the proper allocation you once started with not long ago. By working with an advisor, you gain access to necessary ongoing maintenance, which in turn keeps your portfolio exposed to fresh opportunities while unfastening the bad ones throughout the marketplace. When it comes to ideal asset allocation, it is simply not enough to throw darts at a wall and hope it lands in the same spot every time. Your advisor can help you come up with a disciplined and actively managed investment strategy that will keep your savings growing with the greatest amount of certainty and least amount of risk.
To drive the point home, let’s consider if you invest in the market at $100 a month, and return an average of 1% a month or 12% a year, compounded monthly over the next 40 years. A friend of yours, who is the same age as you, doesn’t begin investing for another 30 years, where he instead invests $1,000 a month for 10 years, also averaging 1% a month or 12% a year, compounded monthly.
Who will have more money saved up in the end?
Your friend will have saved up around $230,000. Your retirement account will be upwards of $1.17 million. Even though your friend invested over 10 times as much as you in the final 10 years, the power of compound interest makes your portfolio significantly bigger.
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Do you want to learn more information about how this relates to your current financial portfolio? Give us a call at (410) 823-5442 or email invest@peakeadvisors.com.
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