Whether you’re just starting your career or nearing retirement, you need to consider a strategy for your investment direction. A life stage investing plan helps you alter your investment option mix as your circumstances change. Your life stage is determined by how many years you have until retirement and what you’re doing with your retirement savings.
Consider at any life stage:
Calculate where you are now. Check the retirement account balance at principal.com or call toll-free, 800-547-7754.
Determine your tolerance for risk by using the Investor Profile Quiz at principal.com. The Principal Financial Group® lists investment options by the applicable asset classes, from short-term fixed income
to international equity. To help you determine the mix or ratio of investment options in each investment category, use your completed quiz results to find the profile that matches your Risk Tolerance Score and Years to Retirement. The pie chart next to each profile shows a suggested asset allocation model in proportions that fit each particular profile. Please keep in mind that this information is just a guideline and for educational purposes — it isn’t intended to tell you how to invest.
Re-evaluate your financial goals and investment strategies at least annually or as significant events occur to see if you are on track. Roll over retirement funds into an Individual Retirement Account (IRA) or into your new employer’s plan if you change jobs.
20s & 30s: Getting started
You are likely dealing with the pressures of your early career and starting a family. This is still the time to think long-term because even small sums invested now may turn into a substantial nest egg in the future.
Consider the following suggestions:
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- Eliminate debt. Pay off your student loans and credit card debt as soon as you can.
- Contribute at least something to a 401(k) plan or an IRA.
- If your employer matches contributions, try to contribute at least enough to get the matching contribution.
- Increase your contribution by 1 percent every year or every time you receive a raise or promotion.
- Consider taking an investment risk because you have more time to weather the ups and downs of the market.
- Put aside three months of rent and expenses in a money market savings account.
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40s & 50s: Building a Solid Portfolio
You are likely at the peak of your earning power. You may wish to make the most of this time by solidifying your investment goals and mapping your needs for the future.
Consider the following suggestions:
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- Continue contributing to a 401(k) plan or Roth IRA. If you are contributing the maximum tax deferred dollars to the 401(k) plan, consider opening a Roth IRA. Contributions are taxed now but earnings are generally tax free when you retire, as long as certain conditions are met.
- Increase your contributions to retirement accounts by at least 1 percent of your salary per year.
- Set your retirement goals. When do you plan to retire? How much income do you want at retirement? View the retirement calculators at principal.com to help determine if you are contributing enough.
- Consider acquiring long-term care insurance as a hedge against future health care costs.
- Re-balance retirement funds periodically. Consider how retirement funds are allocated across investment options as well as between you and your spouse.
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5-10 Years to Retirement: Investment Options
When you are within 5 to 10 years of retirement, you should plan very specifically. Whatever you plan to do, you should know what your retirement income will likely be. You may wish to review your goals once or twice a year and consider getting feedback and guidance from a financial professional.
Consider the following suggestions:
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- Build a detailed retirement budget.
- Determine what income you expect to have from Social Security, your 401(k) plan, pension, and other investment accounts.
- If needed, spend less and save more. Invest 20 to 25 percent of your gross income. Take advantage of 401(k) plan catch-up contributions. At age 50 and over, you can invest an additional $5,500 in 2010.
- Continue to invest for growth, but review your investment mix with your financial professional to help determine if it’s right for you.
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Retirement: The time you’ve waited for is finally here!
Consider the following suggestions:
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- Consult with a financial professional to help find an optimal plan for withdrawing money for daily expenses.
- Withdraw conservatively. Acquire from Social Security first, then personal savings, then your retirement accounts. If you have a Roth IRA draw from that investment first, since earnings are not taxable.
- By age 71⁄2 you are generally required to take minimum distributions from the 401(k) plan and IRAs.*
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Not withdrawing will cost you 50 percent penalties on the amount that should have been withdrawn.