Retirement investing goals for your 20s, 30s and 40s

Making smart investment decisions for retirement begins with setting appropriate goals. The investment choices you make in your 20s may look vastly different from those in your 30s or 40s. Understanding what you should be working toward at each of these stages can help shape your overall retirement plan.

[See: 6 Strategies to Avoid Working in Retirement.]

Get started in your 20s. According to Bankrate, 46 percent of young adults ages 18 to 35 who don’t invest cite a lack of money as the reason, but waiting until you’re earning a bigger paycheck could cost you in retirement.

“Not saving means not taking advantage of compound interest, which can make a huge impact over time,” says Stephanie McElheny, a certified financial planner and manager of financial planning for PNC Investments in Pittsburgh.

The question for many 20-somethings is where to begin. Investing in your employer’s retirement plan is a logical place to start, particularly if it offers a matching contribution. An individual retirement account is another option. Your smartphone can also be an investing path if you’re new to the market.

“A good way to get started investing in your 20s is by taking advantage of mobile apps that round up the money you spend and invest the difference,” says Matt Reiner, CEO and co-founder of Wela, a personal financial planning app. “This gets you investing as soon as possible with minimal research.”

Aim for consistency. For many 20-somethings, especially those with student loan debt, investing large amounts of money for retirement may not be realistic. A more effective strategy may be to invest smaller amounts regularly.

Alex Kramer, market leader at U.S. Bank’s Private Client Reserve in Milwaukee, says 20-somethings should save as much as possible but also be realistic about what they can do based on their income. “Committing to a savings plan is like any other behavior that you want to make a habit,” Kramer says.

He recommends that 20-somethings invest a set percentage of their income rather than a specific dollar amount. That can be complicated, however, when a chunk of your income goes toward debt repayment.

Mike Serio, regional chief investment officer at Wells Fargo Private Bank in Denver, says younger investors should compare their portfolio’s expected after-tax rate of return against the interest rate paid on the debt.

“If the expected return of the portfolio is larger than the cost of borrowing, it would make sense to pay off debt more slowly,” Serio says. “On the other hand, if the interest rate on the debt is higher than the expected rate of return, investors may benefit more from paying off the loan faster.”

Invest for tax efficiency in your 30s. At this stage, with your income probably increasing, you should make the most of tax-advantaged retirement accounts.

“Maximizing your savings is important, and for most folks, their employer-sponsored retirement accounts and IRAs will need to provide the bulk of their future retirement income,” says Doug Amis, president and chief operating officer of Cardinal Retirement Planning in Cary, North Carolina.

Check how much you’re investing in an employer’s retirement plan, and see if you can increase your contributions. Your plan’s auto-escalation feature, if there is one, lets you step up your contributions periodically if you’re uncomfortable about saving more all at once.

Also, think about diversifying your savings using other tax-advantaged accounts.

“Contributing to a 401(k) is great, but Roth IRAs and Roth 401(k)s have compelling benefits for those that can afford to diversify their savings strategies,” Kramer says.

A Roth IRA or Roth 401(k) allows tax-free withdrawals in retirement with no required minimum distributions. If your tax bracket in retirement is likely to be higher than it is now, the Roth may be a better fit.

[See: 8 Tips for Investing in Your 30s.]

Plan for growth but prepare for setbacks. In your 30s, you can afford to be more aggressive with your investment strategy, but you should still manage risk.

“Taking undue risk, or more risk than you’re comfortable with or can afford financially, can create unnecessary emotional stress and, in many cases, will leave you no better than if you had invested moderately,” McElheny says. “More risk allows the opportunity for greater returns but also the chance for much greater losses.”

By your 30s, you should also be comfortable with market corrections. Kramer says having a cash cushion outside of retirement investments can help investors weather the occasional storm.

Too often, “when markets drop, investors sell out of fear and lose money,” Kramer says. “Having a stash of cash set aside is a reminder that you aren’t going to go broke.”

Set the tone in your 40s for later years. Your 40s are a time to fine-tune your investment strategy.

“In your 40s, you have less time to get your portfolio where it needs to be,” says Victor Medina, founder of Medina Law Group and president of Private Client Capital Group in Pennington, New Jersey.

At this stage, Medina says, you may want to consider splitting investments into a guaranteed income stream, and for that, he recommends a fixed indexed annuity.

“These are complicated investments, but when used correctly, they can provide a backstop against any loss of principal and keep your money moving in a forward direction,” Medina says. “In addition, they can provide guaranteed income for life, which reduces stress on your portfolio because you won’t have to withdraw as much soon into retirement.”

Serio recommends that 40-somethings take stock of their retirement account balance and adjust their savings rate if there’s a shortfall.

[See: 11 Tips for the Sandwich Generation: Paying for College and Retirement.]

Today’s longer life expectancies also should be factored in because investors will need those assets for a long time, Serio says.

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