Retirement strategies for every age

20s: embrace market ups and downs

When you’re in your 20s, retirement might still be decades away. That can make market volatility an investment opportunity.¹ There are two related reasons to consider investing more aggressively when you’re young.

First, younger investors may handle market ups and downs easier because they have time before they tap those retirement funds.

Second, with time on your side, you can benefit from the concept of compounding interest, or returns. Let’s say you’re 25 and started saving $5,000 a year in your 401(k). You’ve invested 60% in stocks and 40% in bonds, and your goal is to retire at 65. According to historical averages over the past 30 years, this mix would have earned an annual average return of 8.6%.² Using this average rate, by the time you’re 65, you would have earned just north of $1.5 million.³

To reduce the risk of market fluctuations, create a diversified portfolio that holds different asset classes.⁴ A financial advisor can help you choose the right mix.

If you do not have access to a 401(k) or other employer-sponsored plan, or if you do but would like to save outside of that plan, you could also invest in a traditional individual retirement account (IRA) or a Roth IRA. The main difference between the two accounts being that with a traditional IRA, the savings grow tax-deferred until you withdraw them in retirement⁵ while any contributions you put into a Roth IRA aren’t tax-deductible now, but your retirement withdrawals are generally tax-free.⁶

40s: capitalize on higher income

At this stage of your life, you’re potentially at the peak of your career and your earnings may have also risen. It’s an ideal time to revisit what you’re putting away for retirement.

Consider increasing contributions to your 401(k). One tactic is to add a little more whenever you get a pay raise.⁹ Check with your employer to see if your 401(k) has a setting which automatically increases your contribution annually, which would help make it easier to save more money.¹⁰

If you’re in your 40s, retirement is a little closer on the horizon and building up a strong emergency fund can help ensure you don’t need to tap into your savings early. Additionally, having a healthy emergency fund can help you get a head start building the cash savings you’ll need to have once you enter retirement. Experts suggest retirees should have at least one year¹¹ of daily living expenses in cash, and some recommend as much as three years to help weather any natural market volatility.¹²