How to Approach Retirement Savings During Different Parts of Your Life

Sometimes, investing feels like an easy concept. Put money into stocks, private equity, and valuable commodities, then just let those market-driven vehicles put your capital to work.

Of course, it’s not at all that simple. Investing takes planning, patience, and a strong resolve when you watch a seemingly great company go belly up. For those who have these attributes, turning stocks and real estate into cash feels simple enough. For those who don’t have the experience and restraint to deal with finicky markets, it’s a lot more difficult.

Not only does temperament play into one’s ability to invest, but each individual has to organize their funds and assets differently. We’re not all born with an equal allotment of investment capital, and a commodity that fits nicely into one person’s or couple’s portfolio could severely hamper another’s plans for investing for retirement.

As I’ve stated before and will state again in the future, anyone can make good financial moves, increase their wealth. and build up respectable retirement savings. It may take some people longer than others, but there’s always a path forward, and the path you choose oftentimes has a lot to do with your age.

On a very basic level, you have more risk immunity when you’re young and even more if you’re unmarried and without kids. While investing in your 30s, losing $30,000 will certainly make you angry and probably more than a little anxious. Fortunately, you have 30+ years to recoup those losses before you’ll be thinking about retirement. If you lose $30K of your retirement savings at 70, that’s a very different predicament.

This isn’t an endorsement of freewheeling through your 20s and 30s. Starting retirement savings at 40 is never ever a good idea. A smart, adaptable strategy should be in place at every stage of your life. By recognizing how the strategies surrounding investing for retirement evolve and change as people get older, you can improve your ability to set goals and make the most of every dollar and every year you have.

Investing in Your 30s

I’m skipping a whole decade (or two) during which you should absolutely save and invest, but don’t stop reading if you’re only 22. From your very first allowance or paper route, I want you to focus on wealth management and putting money to work. This may seem like an intolerably dreary outlook on life, but this helps you get your investing priorities straight and avoid picking up bad financial habits that cause a lot more trouble than you’d think.

However, I recognize that investment opportunities may not exist for high school and college students, and recent graduates saddled with student loan debt can also struggle to get money into savings. Frankly, too many Americans ignore the need to save until they start investing in their 30s and realize how much valuable time they’ve already wasted.

For all these reasons, investment group #1 is for those early millennials who got a late start on investing for retirement but still have time to get things back on track. If you started in your late teens or early 20s, give yourself a pat on the back and read on.

If you’re an early-30s reader, the two most common investment strategies are hopefully both available to you:

• Workplace 401(k)
• Personal IRA

Of those options, the IRA is stronger. You have the choice between a Roth and a traditional IRA, which offer different tax advantages. You may also face fewer penalties and restrictions with your investment capital, and you almost certainly won’t have your account assaulted by as many hidden fees as you would with a 401(k).

With all that said, investing in both of these accounts is a strategy that makes sense for a lot of people. This requires stricter budgeting and a much larger percentage of your earnings going toward savings; you shouldn’t feel bad if two retirement accounts are one too many. If you have to choose, an IRA gives more flexibility, better control, and stronger investment options.

If you can manage both, the benefit of an employer-sponsored 401(k) comes by way of the financial match. If you have a job you love and plan to be there for several years (long enough for your contributions to become vested) you can grow substantial retirement savings fairly quickly without taking a significant hit to your paycheck. After you leave that company, transfer the funds into an IRA and keep contributing and growing the money.

The goal with retirement accounts is to build them fast and furiously in the early going, well before you start thinking about winding down your career and perhaps even before you start a family. However, contribution limits keep you from throwing a million dollars into an IRA when you’re 25 and calling it a day. That’s why having two accounts makes sense, and it’s also why you have a few more strategies to look into:

• Stocks
• Real Estate
• Private Equity

Stocks can be very exciting, but the best way to invest in company shares is to take the excitement out of the process. Skip the penny stocks you don’t understand and go with affordable companies you know and trust. Remind yourself that the market continually fluctuates and long-term value is the name of the game. Over the past 90 years, the S&P 500 annual returns average at nearly 10%. That’s about double the rate of bonds and cash, showing that those with patience can make great use of the stock market.

Real estate is always a good investment, as evidenced by investors buying up properties as fast as possible after the market bottomed out. Now, little more than a decade later, housing prices are higher than they were before the bubble burst and don’t show signs of dipping anytime soon.

With that in mind, a house can make an excellent investment for people in their 20s and their 30s. Specifically, if you buy property in your 30s, you can all but guarantee the price will have gone up substantially by the time you retire. If you bought an average American house in 1940, you will have spent about $3,000. 40 years later, the median American home value was nearly $50,000. The median American home price now? Inching upwards of $200,000 (and much more expensive in quite a few markets).

Think about it: do you know anyone in their 90s? At the age of 20, that person could have bought a house that has since increased in value by about 6,000%. It doesn’t even have to be a very nice house!

Before you sprint to the realtor and get preapproved for a loan, remember that there’s a right way and a wrong way to go about buying a home. The wrong way is to take on a lot of debt. I don’t ever advise people to borrow for purchases that don’t qualify as assets, and the home you plan to live in for a few decades doesn’t meet that qualification. An asset puts money in your wallet or your retirement account, and while your home might go up in value, that wealth generation doesn’t pad your pockets untill you’re ready to sell.

If you have the capital to buy a house in cash, go for it; if you have the intention to fix and flip a property, thereby providing a means to immediately repay the lender, knock yourself out; and if you want to buy a commercial property and rent to tenants, thereby bringing in the cash needed to pay the mortgage and maybe skim a little off the top, I very much support that choice.

Hopefully, that clarifies the difference between homebuying as an investment versus a living expense. If you have a steady job and can afford one or more properties in your 30s, you’re making a very smart investment. The value will rise and you might be able to create passive income in the meantime. Real estate should always be on your investing radar.

Our last option for investing in your 30s, private equity, offers another good way to grow your nest egg when done correctly. Lots of people use financial advisors to help them invest in small businesses, but you can make this happen on your own if you do the work. Certain websites enable people of all income classes to put money into private companies and business lending. You can start small and avoid big risks as you get more comfortable and develop your strategy.

Essentially, your 30s offer a great time to make sure plenty of money gets funneled into your retirement account(s), as well as a decade during which you should spend some time exploring alternative investments and stocks. If you lose $1,000 on a stock that goes south, ideally you learn from the experience without getting too gun-shy. Smart investing involves risk and the occasional loss, and it’s very helpful to learn these truths while you’re still relatively young.

Investing in Your 40s

From where I’m sitting, your 40s and 30s don’t look very different. People are having kids at 32 and 42 alike; people between 40 and 50 switch jobs, get promoted, take vacations, and buy houses, just like those 10 years younger. Readers of this blog in their 40s probably see a lot of their investing strategy described in the above section.

The one big difference when saving for retirement at 40, as you’re undoubtedly aware, is time. You have a decade less before you hit retirement age, and that means you have fewer years for money to compound and grow itself. In a perfect world, you’ll soon reach a point where your contributions pale in comparison to the annual returns your retirement account earns on its own. If you started investing at 20, that’s likely where you’ll end up; starting retirement savings at 40 just means you’ll have to work harder for it.

For people saving for retirement in their 40s, 401(k)s offer one distinct advantage over IRA accounts, and that is the contribution limit. You can put $18,500 into a 401(k) each year, but you can only throw $5,500 into your IRA. If you have a 401(k) through an employer and you’ve been at the job long enough to be fully vested, contribute like crazy. Putting almost $20,000 a year into an account may not be feasible for some, but as long as you work with a trustworthy provider and you’ve seen the balance in your account go up each year, you should strive to invest as much as possible.

If you don’t have that option, make sure to max out your IRA and invest the rest into low-fee stocks and shares that pay dividends. Your standard brokerage account works just like your retirement account, except you don’t have all the rules and safeguards in place (for better or worse). You want to make sure you don’t take on lots of risk, but with 20+ years before you retire, you also don’t want to put every dollar into bonds and only see a 3.5% return. Saving for retirement at 40 is all about pursuing reasonable gains without being in danger of losing your shirt.

At this age, real estate still makes for a smart investment, but only if you know what you’re doing. Taking a chance on a questionable property with all sorts of hidden problems could set you way back. As nice as it would be to flip a house for a profit or start bringing in some monthly rent, you don’t want to spend all your savings on a house that puts you in the red for a decade. Buy a property if you’ve been saving up and you have a solid plan for how and when you’ll rent or sell it, but be cautious otherwise.

Like I said just above, saving for retirement at 40 looks a lot like the same thing at 30. Aside from the twinge of anxiety you’ll feel as you inch toward the half-century mark, you get to live life much like you did in the previous decade. However, you don’t have the luxury of ignoring your retirement savings. If you didn’t invest in your 30s, shame on you for passing that pressure on to your 40-year-old self. If you still avoid starting retirement savings at 40, not only will 50-year-old you be angry, but 60-year-old you will be livid when retirement gets pushed off due to insufficient funds.

Investing in Your 50s

This is the home stretch! If you aren’t ready for it, you need to turn that around in a hurry.

You’ll hear it said that people over 50 should start taking money out of the stock market so as to avoid losing money once they enter retirement. There’s some sense to this, but you have to look at the bigger picture. While you might plan to retire at 65, you’ll probably plan to live for another 20 or 30 years. Retiring doesn’t mean you get to start spending money without repercussions, so you need to have some wealth that continues to grow.

As an example, imagine if you turned 70 at the end of 2013 and decided you were done with the stock market. On January first, 2014, the Dow opened at 16,572. It closed at 17,823 on the last day of the year. As you may or may not know, it’s currently bouncing around about 8,000 points higher than that.

The Dow average doesn’t directly equate to the wealth in every investor’s pocket, but it’s a very good indicator of the market’s continued rise. The bottom will drop out now and again, but a diversified portfolio will help you weather those storms. If you hopped out of the market at 70 in 2014, you’d be a fairly angry 79-year-old right now.

For those of us who have more of a natural aversion to risk, there’s no shame in adjusting your holdings to favor cash and bonds a little more. I might tell you to put money into stocks, but I don’t want you investing in companies you don’t understand or don’t trust. As you near your 60s, “better safe than sorry” becomes an increasingly applicable phrase.

Here’s an interesting investment strategy for a 50-year-old: pay off your mortgage entirely. If you’re still working to own your home and you can reconfigure your finances to get the whole mortgage paid off, that will free up a monthly stipend that can go directly into your retirement savings. This is especially useful because you can put an extra $1,000/year into your IRA once you hit 50. If you have money going to a debtor other than your mortgage holder, try to take care of that ASAP.

At this stage of your life, you get to start thinking about how much money you need to live off once you retire. Will that amount go up or down when you don’t spend 40 hours a week at work? Setting a target for how much you need to live comfortably each month will help you set contribution limits, figure out a retirement date, and clarify whether an additional income stream might be necessary.

When it comes to passive income in your 50s, whatever you choose won’t have as much time to develop. Private equity could make sense if you have the funding, but chances you take on a young business may not pan out in time. Real estate could provide a great revenue stream, as long as you can handle the life of a landlord. As your 60th birthday creeps closer, you should take care not to pile unwanted responsibilities on your plate.

I hope readers in their 50s, and 40s and 30s, for that matter, skim through this article and feel like things are on the right track. For anyone who worries about being behind, you can’t let that concern stop you from trying. The worst decision of all is to throw in the towel because you forgot to start investing early. Anyone can improve their financial situation, and it’s never too early – or too late – to start.

Make it happen!

Taylor & Megan Kovar

The Money Couple