Four Decades to Prepare for Your Retirement

Since retirement is something you save for over a long, long, lone, long time, it's very easy to lose sight of where you should be in your savings plan at any given time. That's why I like this article from USA Today -- it gives retirement objectives (plus portfolio suggestions) for the various stages of a person's life. Here are the details:

20 to 29

You're young; you're starting your career; you're broke.

Your Portfolio   

• Standard & Poor's 500 stock index fund -- 50%
• Small-cap core stock fund -- 25%
• International stock fund -- 25%

1. Start your 401(k) at work. Contribute at least up to the company match, if any.

2. Start a Roth IRA if you don't have a 401(k) — or if you have a 401(k) and can afford a Roth, too. You can tap your Roth for a first-time home purchase, if needed. And you can withdraw principal penalty-free.

3. Start an emergency fund, says Kurt Brouwer, financial planner in Tiburon, Calif. If you don't have a bit saved for a rainy day, you'll have to go into debt for emergencies — or tap your retirement fund.

4. Make a living will, so your family will know your wishes in case of a health emergency. You'll need one when you retire, but you never know what will happen in the meantime.

30 to 39

You're still young; you're starting a family; you're in debt up to your eyeballs.

Your Portfolio   

• Standard & Poor's 500 stock index fund -- 50%
• International stock fund -- 20%
• Small-cap core stock fund -- 15%
• Mid-cap growth stock fund -- 15%

1. Don't reduce your retirement savings for college savings. You can finance college; you can't finance retirement.

2. Use your 401(k) to help you save. A 401(k) lets you save money before taxes. Suppose you're in the 25% tax bracket, earn $50,000 a year, and want to save $3,000 a year. Because of the tax savings, that $3,000 would reduce your take-home pay just $2,225.

3. Don't confuse whole life insurance with a retirement plan, says Peggy Ruhlin, a Columbus, Ohio, financial planner. "Life insurance is good, and you need it to protect your family. But it's not for retirement savings."

4. Write your will. You never know.

40 to 49

You're middle-aged; you're doing OK; you're starting to get worried.

Your Portfolio   

• Standard & Poor's 500 stock index fund -- 40%
• International stock fund -- 15%
• Small-cap value stock fund -- 15%
• Mid-cap growth stock fund -- 15%
• Bond funds -- 15%

1. If you're not contributing the maximum to your 401(k), this is the time to do it.

2. Your rainy-day fund should equal two to three months' expenses.

3. If you plan to remain in your home, refinance to make sure your mortgage will end when you stop working.

4. If you can fund a Roth IRA, do so. Otherwise, look at alternatives for retirement savings plans, such as tax-efficient mutual funds.

5. Update your living will and make sure someone has power of attorney. You never know.

50 to 59

You're nearing retirement; you're at the peak of your career; you're terrified.

Your Portfolio   

• Standard & Poor's 500 stock index fund -- 30%
• Bond funds -- 30%
• Small-cap value stock fund -- 10%
• Mid-cap growth stock fund -- 10%
• Mid-cap blend stock fund -- 10%
• International stock fund -- 10%

1. If the kids are out of college, consider reducing your life insurance and increasing your savings.

2. Take advantage of the catch-up provisions for 401(k)s and IRAs, which let you contribute more each year.

3. At 55, start reviewing your Social Security benefits estimate every year and get estimates for any pensions you might receive. See how much your savings will have to be tapped to meet your expenses.

4. Update your will. You never know.

Here are my thoughts:

• Lots of emphasis on S&P 500 index funds. I have a lot in these too (with Vanguard), so I'm glad to see at least one person agrees with this strategy.
• "You can finance college; you can't finance retirement." I never thought about it this way, but this is a true statement (though the best alternative is not to have to finance either of them).
• I need to update my will. You never know.

Comments

[Matt Hutcheson]

Hi -

Great article. I would like your permission to link to your site. Please let me know if you would be ok with that. matt@theretirementhour.com

Matt