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Retirement Plan Considerations at Different Stages of Life

Feb 18, 2020 | 6 minute read

RetirementStages

Throughout your career, retirement planning will likely be one of the most important components of your overall financial plan. Whether you just graduated and accepted your first job, are starting a family, are enjoying your peak earning years, or are preparing to retire, your employer-sponsored retirement plan can play a key role in your financial strategies.

How should you view and manage your retirement savings plan through various life stages? Here are things to consider.

Just Starting Out

If you’re a young adult just starting your career, you’re likely feeling a number of different challenges. College loans, rent, and car payments all may be competing for your paycheck. How can you consider setting aside money in your employer-sponsored retirement plan? After all, retirement is decades away.

Before you answer, consider this: the decades ahead of you can be your greatest advantage. Make time work for you through the power of compounding. Compounding happens when your plan contribution dollars earn returns that are then reinvested back into your account, potentially earning returns themselves. Over time, the process can snowball.

Say at age 20, you begin investing $3,000 each year for retirement. At age 65, you would have invested $135,000. If you assume a 6% average annual return, you would have accumulated a total of $638,231 by age 65. However, if you wait until age 45 to begin investing that $3,000 annually and earn the same 6% return, by age 65 you would have invested $60,000 and accumulated a total of $110,357. Even though you would have invested $75,000 more by starting earlier, you would have accumulated half a million dollars more overall.1

That’s the power you have as a young investor, the power of time and compounding. Even if you can’t afford to contribute $3,000 a year ($250/month) to your plan, remember even small amounts can add up through compounding. Enroll in your plan and contribute whatever you can, then try to increase your contribution amount by a percentage point or two every year until you hit your plan’s maximum contribution limit. As debts are paid off and your salary increases, redirect a portion of those extra dollars into your plan.

Finally, time offers an additional benefit to young adults; the potential to withstand stronger short-term losses in order to pursue higher long-term gains. That means, you may be able to invest more aggressively than your older colleagues, placing a larger portion of your portfolio in stocks to strive for higher long-term returns.2

Getting Married and Starting a Family

You will likely face even more obligations when you marry and start a family. Mortgage payments, higher grocery and gas bills, child-care and youth sports expenses, family vacations, college savings contributions, home repairs and maintenance, and healthcare costs all compete for your money.

Although it can be tempting to cut your retirement savings plan contributions to make ends meet, do your best to resist temptation and stay diligent. Your retirement needs to be a high priority. Are you thinking about taking time off to raise children? That is an important and often beneficial decision for many families. But it’s a decision that can have a financial impact lasting long into the future.

Leaving the workforce for prolonged periods not only hinders your ability to set aside money for retirement but also may affect the size of any pension or Social Security benefits you receive down the road. If you think you might take a break from work to raise a family, consider temporarily increasing your plan contributions before and after you return to help make up for the lost time and savings. Or perhaps your spouse could increase his or her contributions while you take time off.

Lastly, while you’re still approximately 20 to 30 years away from retirement, you have decades to ride out market swings. That means you may still be able to invest aggressively in your plan. But be sure you fully reassess your ability to withstand investment risk before making any decisions.

Reaching Your Peak Earning Years

The latter stage of your career can bring a variety of challenges and opportunities. Older children typically come with bigger expenses. College bills may make their way to your mailbox. You may find yourself taking time off unexpectedly to care for aging parents, a spouse, or even yourself. Healthcare expenses can begin to eat up a larger portion of your budget. And those pesky home and car repairs never seem to go away.

On the other hand, with 20+ years of work experience behind you, you could be reaping the benefits of the highest salary you’ve ever earned.

With more income at your disposal, now may be an ideal time to kick your retirement savings plan into high gear. If you’re age 50 or older, you may be able to take advantage of catch-up contributions, which allows you to contribute up to $26,000 to your employer-sponsored plan in 2020 (up from $25,000 in 2019), versus a maximum of $19,500 for most everyone else ($19,000 in 2019).

In addition, if you haven’t met with a financial professional yet, now may be a good time to do so. A financial professional can help refine your savings goals and investment allocations, as well as planning ahead for the next stage.3

Preparing to Retire

With just a few short years until you celebrate the major step into retirement, it’s time to begin thinking about when and how you will begin drawing down your retirement plan assets. You may also want to adjust your investment allocations with an eye toward asset protection (although it’s still important to pursue a bit of growth to keep up with the rising cost of living).4 A financial professional can become a very important ally in helping to address the various decisions you will face at this juncture.

You may want to discuss:

  • Healthcare needs and costs, as well as retiree health insurance
  • Income-producing investment vehicles
  • Tax rates and living expenses in your desired retirement location
  • Part-time work or other sources of additional income
  • Estate planning

Other Considerations

Throughout your career, you may face other important decisions related to your retirement savings plan. For example, if your plan provides for Roth contributions, you’ll want to review the difference between these and traditional pre-tax contributions to determine the best strategy. While pre-tax contributions offer an up front tax benefit, you’ll have to pay taxes on distributions when you receive them. On the other hand, Roth contributions do not provide an up front tax benefit, but qualified withdrawals will be tax free.5 Whether you choose to contribute to a pre-tax account, a Roth account, or both, will depend on a number of factors.

At times, you might feel tempted to take a loan or hardship withdrawal from your account in financial difficulty, if these options are available in your plan. If you find yourself in this situation, consider a loan or hardship withdrawal as a last resort. These moves will not only slow your retirement saving progress, but could have a negative impact on your income tax obligation.6

Finally, as you make decisions about your plan on the road to retirement, review it alongside your other savings and investment strategies. While it’s generally not advisable to make frequent changes in your retirement plan investment mix, you will want to review your plan’s portfolio at least once a year, and as major events (e.g. marriage, divorce, birth of a child, job change) occur throughout your life.

Is Your Retirement Plan on Track?

It’s always best to review your financial portfolio periodically to ensure you’re on the right track. Investment Services, provided by CUSO Financial Services, L.P. (CFS),7 can review your current situation and help determine strategies to reach your goals. Contact Investment Services today at: 513.243.6510 or email Todd Blessing at: todd.blessing@cusonet.com or Erik Waldron at: erik.waldron@cusonet.com.

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1 This hypothetical example of mathematical principles does not represent any specific investment and should not be considered financial advice. Investment returns will fluctuate and cannot be guaranteed.

2 All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful. Investments offering a higher potential rate of return also involve a higher level of risk.

3 There is no assurance that working with a financial professional will improve your investment results.

4 Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against a loss.

5 Qualified withdrawals from Roth accounts are those made after a five-year waiting period and you either reach age 59½, die, or become disabled.

6 Withdrawals from your employer-sponsored retirement savings plan prior to age 59½ may be subject to regular income taxes as well as a 10% penalty tax (unless an exception applies).

7 Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a Registered Broker-dealer (Member FINRA/SIPC) and SEC-registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. General Electric Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members. 

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.