When asked to choose between a college education and their own retirement, parents will often put their children first and focus on saving money for college.
Michael J. Daso, CHFC, a financial consultant at AXA Advisors LLC, understands the thought process, but doesn’t agree with it.
“I believe strongly in flipping it,” Daso says. “Retirement should be the first priority. There are dollars out there for college through loans, grants and scholarships. But there are not dollars available to borrow for retirement. Too often, we focus on our short-term needs first and ignore the long-term financial goals because they seem so far away.”
Whether it’s a college fund or a retirement plan, saving money today for tomorrow has never been an easy thing to do. Determining the best plan to maximize your investment is further complicated by your age and life status.
“Time horizon has the most significant impact on how aggressive or conservative you should be in your investment strategy,” Daso says. “If you have 20 years until retirement, you can afford to be more growth oriented than someone who might be retiring next year. You need to reassess that risk level over time and adjust your strategy as you get closer to the date of your financial goal.”
Smart Business spoke with Daso about how your age and life status can affect your wealth-building strategy.
Which age groups tend to have a more conservative investment strategy?
The baby boomers and millennials both tend to be more conservative. A lot of the millennials entered the workforce during the 2008 financial crisis. It was a really tight job market and a period of historically low returns in the stock market. That made a lot of millennials worry and it carried over into their investment philosophy. It’s the same thing with the baby boomers, so they tend to be more conservative as well.
The challenge for both groups is if you’re too conservatively invested, particularly with the low interest rate environment we’re in now, you won’t even keep pace with inflation. Then we have the middle generation, Generation X. The biggest mistakes made by members of this group are not saving enough money, and then outspending what they make each month.
It isn’t so much a risk concern as a cash flow concern. The best way to combat that problem is to set up automatic monthly savings plans, either through your 401(k) at work or through supplemental savings. One of the best ways to do this is through monthly automatic bank transfers. It forces you to save money and pay yourself first.
How do you know how much you will need to retire?
Two of the biggest questions people have are will I have enough to retire and will I outlive my retirement outcome. It used to be that a three-legged stool was a good metaphor for what you would need in retirement. You had Social Security, your company pension and then your personal savings only had to provide a third of your retirement income.
But these days, fewer and fewer people are retiring with a pension from their company. They have to come up with a larger percentage of their retirement income from their personal savings. That is making them scared to lose their nest egg and it causes them to invest too conservatively.
What are some principles to follow regardless of age?
Establish an emergency fund before you save for other long-term goals. Long-term savings accounts have penalties if you need to access them prior to retirement. Life is definitely unpredictable and having an emergency fund should be the basis of your sound financial plan.
Start small and get something going where you’re saving on a monthly basis. It could be $100 into an investment account on the 15th of each month. That’s really empowering and helps change your mental outlook on saving. It can spill over into changing the way you spend money on a monthly basis. Once you get the account open and started, even if it’s a modest amount, that’s a huge hurdle to clear. ●
Securities are offered through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA/SIPC. Insurance and annuity products are offered through AXA Network, LLC. AXA Advisors and AXA Network do not provide tax or legal advice. AGE 100896 (1/15)(Exp 1/17)
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