You may think that the decades leading up to retirement are all equally important to ensuring you have enough money.
You’d be wrong.
Recent reports show that there’s a sweet spot in your saving time frame that can make or break your retirement.
No matter how early or late you start putting money aside, if you don’t treat this handful of years right it’ll crush your dreams of a luxurious retirement.
Let me tell you where your window of opportunity is, and how to win yourself a million-dollar retirement.
If you’ve even looked into saving for retirement, you know the rule: risks belong to younger portfolios, and they should get more conservative as you age.
Because the majority of your retirement savings will come from the gains in an investment account, your quality of life after you stop working is reliant on two things: your ability to save and the stock market.
Both of which may not be the sturdiest of pursuits.
So how can you ensure that no matter how much you put aside you’ll see the maximum results?
Focus on when you’re saving.
Or more specifically, focus on the sweet spot that can make you the most money.
In our scenario, you should still start saving early and saving consistently.
You can’t achieve a luxury retirement by slacking off on making contributions.
But hopefully this tidbit of information will take some of the stress out of your preparations, and allow you to work in peace before you call it a day.
Financial professionals differ in opinion when it comes to the “perfect” time to do anything – when to start saving, when to start upping contributions, when to start taking money, and the list goes on.
Sometimes they’ll agree on vague terms (when to start saving? Early), but more often than not you’re left guessing when to make decisions that will make you the most money.
We don’t have time for that kind of uncertainty.
So let me paint a picture for you.
You plan to retire at age 67, the perfect time to start claiming Social Security (SS) and stop slaving away every day.
You should allow yourself 30 good years to save for retirement, (at least, seeing as SS is based on your 35 highest-paid years). In those 30 years, 5 specific ones are the most important.
The financial institutions making money off of your retirement savings accounts don’t want me to ruin the surprise but I’m going to tell you: the last 5 years you save for retirement are more important than all the rest.
That doesn’t mean you’re wasting 25 years of your life, but it does make a huge difference in the final balance of your account once you’re ready to start cashing out.
Let’s say you start saving at age 37 (at the very latest!). Your portfolio can be riskier, and you can allow your fund to invest in highly volatile, high-return securities.
You have time to recover your money should the market go haywire.
Once you start nearing the finish line, you should start investing more conservatively.
Along the way, about once a year or so, you should evaluate all of your investments. Ones that aren’t performing well should be removed and your risk factor should be reassessed.
When you reach the last five years before retirement, so for our purposes age 62, it’s crunch time.
Recently released reports show that no matter what kind of returns you saw over the first 25 years, funds with poor finishes return almost half what funds with strong finishes did.
Let’s say you invested $10,000 annually for 30 years with a 5% return throughout (realistically this number will fluctuate and will likely be higher in your case).
If your portfolio had a great start but a bad end, you could retire with $485,000.
That may sound like a lot, and you might be content with that figure.
But you’re hardly going to be living in the lap of luxury.
Broken down, that sum could sustain you for 30 years, with $16,000 a year.
Think about your salary now. Sixteen grand is probably only a fraction of how much you take home.
Do you really want to spend your retirement barely above the poverty line?
Now if your portfolio had a bad start and a great end, you could retire on almost double what we said before: $948,000.
With those higher returns you’re likely to get, that could be a million-dollar retirement for you right there.
So now you’re wondering how to make sure your portfolio has a great end, no matter where it started.
Again, the key lies in those last 5 years.
A bad end is caused by not appropriately adjusting your portfolio for risk.
Your savings can’t stomach high risk as you come close to retirement; it doesn’t have the time to heal itself.
If you think it’s prudent to keep the high-risk outlook you started out with, you could just be risking your chance at a seven-figure retirement.