Opinion: Plan well ahead for retirement needs

plan aheadIt is never too early to begin saving toward your retirement goal. Unfortunately, many people choose to wait until retirement is just around the corner to begin thinking about it.

According to a recent survey from the financial services trade group LIMRA, 49 percent of Americans said they weren't contributing to a retirement plan. Younger Americans fared worse, with 56 percent choosing not to contribute to their future. This is especially troubling since younger workers are less likely than older workers to have pension benefits.

In addition, the long-term solvency of Social Security has come into question, with many politicians proposing further delays in the normal retirement age and reductions in how the cost of living is calculated. While there are significant challenges to reaching retirement, your chance of success improves only when you have more time to get there.

While reaching your retirement goal will not be easy, the power of compounding can help. When the money you earn from your investments is reinvested for the potential to earn even more, you are compounding. This may lead to faster growth rates on your principal investment, ultimately supercharging your savings plan. In fact, Albert Einstein was quoted as saying that the most powerful force in the universe is compound interest.

However, in order to fully realize these benefits, it is critical to get started early. That may allow you to save less for a longer period of time, thus making retirement more attainable.

Getting started earlier also helps provide more time to overcome market volatility or poor investment choices. Retirees who began saving only in the last 10 of their work years may not have provided sufficient time to overcome the burst of the dot.com bubble or the recent financial crisis. Remember, a longer investment time horizon may help smooth returns and volatility. In addition, time may give investors the ability to take more risk, and this may help improve the chances of outpacing inflation over the long term. For example, if you choose to begin a savings plan when you have only a few years before retirement, you may not have the time horizon to handle the ups and downs of a stock-heavy portfolio.

While getting started on a retirement savings plan early is easier said than done, starting small may be helpful. Consider establishing small, automatic contributions to a company-sponsored 401(k) plan or an IRA at first. At a minimum, be sure to take full advantage of a company match, if one is available. Monitor cash flow closely, and slowly increase your contribution rate over time, perhaps monthly or quarterly, as this may help the contributions seem less noticeable. Another approach that may help increase your savings rate includes putting a portion of any raises that you receive toward your retirement goal. Imagine that the raise never occurred, and use the funds to help you get back on track.

While beginning a retirement plan early may help improve your ability to reach your retirement goals, it does not protect against investment losses or reduce volatility.

Because everyone's situation is unique, consider speaking to your adviser to determine the most appropriate savings strategy for you.


Kurt J. Rossi, MBA, is a certified financial planner practitioner. He can be reached for questions at (732) 280-7550 and kurt.rossi@Independentwm.com. LPL Financial Member FINRA/SIPC.