Start planning today to ensure a comfortable retirement

In the 1990s, financial planners developed a model based on a person's life cycle to help people understand retirement planning and other financial planning issues. The models may vary slightly, but they generally divide a person's life into the following five time periods or stages:

Stage 1 : Age of Majority
From the age of 18 to 30, a person is generally still single and first begins earning money as an adult.

Stage 2 : Age of Responsibility
The period from age 30 to 45 includes those with developing careers and growing families.

Stage 3 : Age of Maturity
Between the age of 45 and 55, people are theoretically approaching the height of their careers and family development.

Stage 4 : Age of Reflection
At age 55 until about 65, people are usually in the pre-retirement phase and have the "empty nest" syndrome to look forward to.

Stage 5 : Age of Tranquility
The last, but certainly not the least, stage in a person's life hopefully finds the retiree enjoying the fruits of his or her labors and dealing with post-retirement issues.

As you navigate through the life cycle stages, remember that most planning issues will involve answers to the following questions:

• How much time do I have left until I can retire?
• How much can I invest toward retirement?
• Will the magic of compounding work for me?
• How much risk am I willing to take when making my investment choices?

Stage 1: Age of Majority

Meeting Your Savings Goal

Tip
Saving early is great, but it is not enough if your savings are earning little or no money. At a minimum, your savings and investments should be making more than the rate of inflation. There are numerous ways to fund retirement. The thing to remember is that being too conservative with your investments at this stage of the life cycle is a very bad thing.

You have to take a long-term investment strategy. Keep in mind that you are trying to build wealth. Although higher rates of return include higher levels of risk that something may go wrong, it is easier for you to bear the risk and recover from it when you are young. Don't be reckless, but save your conservative investments for your later years, especially prior to retirement.

Tip
Given the fact that retirement is still about 20 to 35 years away, your investment plan should not be overly conservative. Ultimately, you must decide on the level of risk you are willing to bear. However, a combination of high-, medium- and low-risk investments, with corresponding rates of return, is probably the best way to go

Meeting Your Savings Goal

Tip

If you missed out on the opportunity to save earlier, you can still make up some of the shortfall by saving more during stage two of the life cycle. You are far enough away from retirement that a smaller amount will have time to grow and benefit from the magic of compounding.

Stage 3: Age of Maturity

Meeting Your Savings Goal

Tip
Another way to increase your retirement savings rapidly is to invest in stocks with high-yielding rates of return.

Investments involve risk. It is foolhardy and poor reasoning to think that you can quickly make up a shortfall in your savings by just investing in riskier investments that supposedly provide a higher rate of return. It is just as likely, though, that such high-risk investments, will fail leaving you in a worse position than before.

The closer you come to retirement, therefore, the more conservative your overall investment strategy should be. You may still have a small percentage of your retirement funds invested in high-yield assets, but you must never ignore your ability to recover if something goes wrong (like a market correction that keeps decreasing stock values for six months).

Tip

At this point, the majority of your retirement savings should definitely consist of conservative investments with lower risk. Although you still want to create a steady stream of income and to beat inflation, you don't have the time to make up a big drop in the value of your investments. For example, many people who were heavily invested in the stock market at the beginning of 2001 had to postpone retirement when the market tumbled and the value of their retirement savings was cut in half.

This doesn't mean you shouldn't think about higher risk investments. Be aware, though, that investing becomes riskier as you get older. You should invest only the amount of money you can afford to lose.

Stage 5: Age of Tranquility

The economy may change drastically and turn a comfortable retirement into a frugal lifestyle. So, just because you reached your retirement savings goal before you retired, it doesn't mean that you will always have enough to meet your needs.

 
Tip
After retirement, your savings and investments should produce enough income for you to live on. If for any reason the savings or investments themselves are tapped into, this will decrease the amount of income that can be produced for you in the future. With continued review of your plan after retirement, it will become clear how much you have lost and how much you may need to make up.