The retirement marathon

Planning your financial future is planning for retirement – and having money to enjoy it.

In 1900, retirement wasn’t a hot topic. Most employers didn’t offer pensions, there was no Social Security, and the average life expectancy was about 50.

But more than a century later, everything’s changed. More than a million people retire every year and most can expect to live 20 years or more. In fact, current estimates suggest that a million or more people now in their 40s will live to be 100 or older.

Ready, set, go

The general wisdom is that planning your financial future starts with your first job. That’s when you can begin participating in an employer’s retirement plan or putting money into an individual retirement annuity (IRA). Even though you’ll probably have lots of shorter-term reasons to invest, such as buying a car or a home, you should be thinking early on about long-term goals: your financial security and the security of those you care about.

You’ll quickly discover that there are lots of ways to invest for the future – including some that have built-in tax benefits. At the same time, you have to remember that you take certain risks when you invest. Your return isn’t guaranteed, and while your account value may increase substantially over time, you could potentially lose some or all of your principal, or the amount you invest.

In your 20s: Getting started

You can get a head start on building your financial future if you start early. The two opportunities you don’t want to pass up:

• Contributing to a tax-deferred or tax-exempt retirement savings plan, either at work or with an IRA – or both
• Setting up an investment account with an insurance company, mutual fund, brokerage firm, or bank

While you may be paying off college debts or struggling to meet living expenses, the advantages of getting an early start on a long-term investment plan are too good to pass up.

Ideally, you should be investing up to 10 percent of your pretax income. If you’re in an employer-sponsored retirement plan that deducts your contribution from your salary on a pre-tax basis, your taxable income will be reduced. That means current tax savings – a reward for doing the right thing.

Though some of what you’ve put aside should be liquid, or easy to turn into cash without loss of value, the best investments may be equities or equity-based separate accounts. The potential growth they can provide over the long term has historically justified the risk of possible losses in the short term.

In your 30s & 40s: Hitting your stride

Even while you’re juggling your income to pay for things that might seem more pressing, like buying a home, supporting a family, or anticipating your children’s college expenses, you need to build your long-term investments.

One technique is to split the amount you invest between long- and short-term goals. Even if you put less into long-term plans than you’d like, at least these investments have the potential to grow, especially if you’re building on a portfolio you started in your 20s.

Most experts agree that long-term investments should be in equities or equity-based separate accounts, but short-term investments should be more liquid. Keep in mind that investing for the long term is good for your current financial situation too:

• You save on current taxes by participating in a pre-tax salary reduction plan
• You may qualify for a mortgage more easily if you have investment assets
• You can borrow from some retirement plans without incurring taxes and penalties

In your 50s: The far turn

You may be earning more than before, but you may be spending more too. College expenses can wreak havoc on long-term investment goals. So can expensive hobbies or moving to a bigger house.

On the other hand, if you’ve established good investing habits – like participating in a pre-tax salary reduction plan and putting money into a balance of equity and fixed-income investments – your long-term goals are more likely to be on track. You may also find that the demands on your current income eventually begin to decrease: The mortgage gets paid off, the children eventually grow up, or you inherit assets from your parents.

That means you can begin to put more money into your long-term portfolio – through your employer’s pre-tax salary reduction plan, in an IRA, and with taxable accounts.

In your 60s: The home stretch

When you start thinking seriously about retirement, you want to be sure you’ll have enough income to live comfortably. If you have money coming in from a pension and investments, you’ll have more flexibility to retire when you want.

Because many people can expect to live 20 or 30 years after they retire, you’ll want to continue to invest even as you begin collecting on your retirement plans. One approach is to deposit earnings on certain investments into an account earmarked to make new ones. Another is to time the maturity dates of bonds or other fixed-income assets so that you have capital to reinvest if good opportunities come along.

Some of the other financial decisions you’ll be facing may be dictated by government rules about when and what you must withdraw from your retirement accounts. Others may be driven by your concerns about healthcare or your desire to leave money to your heirs. At the least, you’ll have to consider:

• Shifting investments to produce more income with fewer risks, in case of a downturn in the financial markets
• Rolling over retirement payouts to preserve their tax-deferred status
• Finding ways to reduce estate taxes and provide money to pay for those that are unavoidable

An easy formula?

One conservative rule of thumb for deciding what investments to make: Add a percent sign to your age. Put no more than that percentage of your assets in fixed-income investments like bonds or CDs. But for most people that approach is too simplistic, ignoring their personal circumstances and aspirations. Since the way you allocate your assets can make a major difference in the return you realize on your investments, it’s an area where it can pay to seek expert advice.

What the future holds

The truth is that retirement age is relative, not fixed. Many government workers retire after 20 years of service – sometimes as soon as their early 40s. Some people work productively through their 80s, thinking of retirement as something other people do. Many others retire the first day they’re eligible. Still others leave work unwillingly, taking early retirement packages they can’t refuse.

What you do about retirement may fit one of those patterns, or maybe one you design for yourself. But whether retirement is a long way off, or sneaking up on you faster than you care to imagine, planning for your financial future has three main ingredients:

• Financial security
• Adequate healthcare
• Lifestyle choices

This article originally appeared in Your Retirement Center, a free retirement education resource from Mutual of America, a Mission:Money sponsor.