One of the biggest benefits of starting to plan for retirement early is that you have more time to save and invest. The power of compound interest means that the earlier you start saving, the more your money will grow over time. 

Another benefit of starting to plan for retirement early is that you have more time to make mistakes and correct your course. If you start retirement planning early, you have more time to adjust your savings and investment strategy if you encounter any setbacks or unexpected expenses. This can help you avoid having to make drastic changes to your retirement plan in the later years of your career.

So, what can you do to start planning for retirement early? Here are a few tips and strategies to consider:

Start Saving Early

As mentioned earlier, the earlier you start saving for retirement, the more your money will grow over time. Even if you can only afford to save a small amount each month, with the power of compound interest over time, that small amount can add up to a big number by the time you retire. 

It is essential that you save your money in a way that the interest you receive on it allows your money to grow with compound interest that beats the rate of inflation.  As many of us have already experienced in life, prices of goods and services grow steadily every year in such a way that a dollar in the future is worth considerably less than a dollar today.  So if you are putting money away for the future, you need to find ways to save that pay interest greater than the rate of inflation.  With compound interest in the right financial instrument, savers can make exponentially more money than they would with saving alone.  Here’s an example: If you start saving $100 per month at age 25 and continue to do so until age 65, you will have put away $48,000 if you used an account with no interest payments. However, with the power of compound interest you will have saved over $144,000 with an account that pays 5% interest compounded annually for the 40 years.  With compound interest, the earlier you start saving the more you will make over time.  In the example above, if you wait until age 35 to start saving with 5% annual compounded interest you will only have saved $78,000 by age 65.

For more information on the power of compound interest, check out the Compound Interest Calculator on the Investor.gov website.

Invest in a 401(k) or IRA

Employer-sponsored retirement plans, such as 401(k)s and IRAs, allow you to save and invest for retirement with pre-tax dollars. This means that you can reduce your taxable income and potentially lower your tax bill.

“If you start retirement planning early, you have more time to adjust your savings and investment strategy if you encounter any setbacks or unexpected expenses.” 

Have Guaranteed Passive Income in your Portfolio 

In the past, many people benefited from a pension that allowed them to budget based on certain guaranteed income that they would receive each month no matter what happened.  Today, pensions are relatively rare and many people instead rely upon income from real estate and investments that may go up or down in value.  Having some guaranteed income (such as what you can find in an annuity) set up for your retirement gives you peace of mind and allows you to budget better.

Realize that social security income won’t be enough: Social security is a type of pension based on the 35 highest earning years of your life. Social security is not a social benefit, it is your money that you paid into the system over the years being paid back to you after you retire. What’s important to understand about social security is that it was never intended to be your only income during retirement.  The government assumes that you will have made other investments during your lifetime that produce income after you retire.  As such, social security is designed to be supplemental to your core investment income and not your principal source of income in retirement.

Diversify

Put your nest eggs in multiple baskets. Throughout life, many of us rely on one investment such as a 401K, business venture or a portfolio of rental properties to provide investment income during retirement.  This is often a mistake as relying on one source of income can backfire especially if the income from that source is not guaranteed.  A 401K can lose value if the market underperforms, a business venture might not sell for what you thought it would be worth by retirement and rental properties may require more maintenance and management costs than expected. Because of the risks involved in any investment, it is wise to hedge that risk by diversifying your portfolio.

Keep Yourself Healthy

The average American lifespan is about 80 years old, however we tend to be healthy, on average, up to 63 years of age.  From that point on, many Americans suffer from medical issues that limit quality of life and can have an enormous impact on finances.  While many of these costs are covered by Medicare, many are generally not, such as nursing home care. 

It doesn’t have to be this way as we can often stay healthy and fit well into our 70s and 80s with proper care.  If you can stay fit and healthy into our golden years you stand the chance of having more disposable income in retirement and more assets to pass on to the next generation.  If you are not already living your healthiest life, small changes to your habits can allow you to stay healthier for longer. Here the three big factors that affect mortality and morbidity as they are viewed by financial institutions:

• Smoking and vaping.  Quitting smoking improves your lifespan, quality of life, increases your disposable income and reduces the cost of insurance premiums.
• Excessive alcohol consumption. Drinking more than a glass of wine a day or the equivalent in other alcoholic beverages can impact your health in a negative way.
• Overeating and poor food choices.  Eating too much food and drink, or eating a diet rich in empty calories can lead to being overweight and having a high BMI.  Like smoking, this can cause health issues that reduce your quality of life and can also make your life insurance more expensive.

Take steps to Protect your Wealth

Savings and other assets have to be protected from occurrences that might happen to any of us over our lifetime.  Incidents such as the death or illness of a breadwinner or caretaker can impact a family financially to the point that they could lose their home.  Illness or disability can make it difficult for someone to continue to work and be productive.  Having to pay for long term care, which currently costs an average of $10,000/month in Florida and New York, can cause someone to have to liquidate all of their assets over time.  Taxes, lawsuits and creditors can erode away the value of an estate that was meant to be left behind to the next generation.  Having the right financial products in your portfolio can prevent these events from negatively impacting your finances.  

Work with a Financial Planner 

A financial advisor can help you create a retirement plan that is tailored to your specific needs and goals. They can also provide you with the guidance, protection and advice you need to work towards your retirement goals and stay on track even when life events get in the way.

Parker Lake – Financial Planning, Risk Management and Asset Protection

Planning early for retirement is crucial to ensuring that you have enough money to support yourself in your golden years and to pass a legacy on to your loved ones. I work with savers early in their careers as well as other pre-retirees and retirees to manage and protect their assets. One advantage of working with me is that my services are free to my clients – I am paid by the financial institutions I work with so that you do not ever have to pay me to receive a comprehensive financial plan.  Another benefit is that I represent a wide range of financial institutions and can provide dozens of options from different providers. 

If you are looking for a sound financial plan for you, your family or your business reach out to me today by calling (305) 613-1498, via my contact form or by booking a consultation directly into my calendar.