Tuesday, June 30, 2009

Retirement Planning For Mid-Career

Mid-career is defined as the period following your 20's and 30's but ends 5-10 years before your retirement. The length of "mid-career" retirement planning varies widely from person to person because some will retire in their 30's and others won't retire until their 70's. Some will have very long "mid-careers" and others will have very short "mid-careers".

Note that the middle years of your career are when two key factors work in your favor with regard to retirement planning. First, you’re probably entering your prime earning years, which means you may have more income you can channel into your retirement savings. Second, retirement is still far enough away that you may want to take advantage of investments with higher risk/return potential to help build your savings momentum.

Your retirement planning objectives for mid-career are two-fold: grow a nest egg large enough to support retirement and grow your financial intelligence to make smarter, more profitable, financial decisions. Where your 20's was simply about getting started building assets, your mid-career years are about turning up the volume on asset growth and your financial skills. It is the beginning point of real retirement planning but is still too far away from your actual retirement date to benefit from formality and over-planning.

The reason you don't want to get into formal retirement planning yet is because too many factors will change between now and when you actually retire. Much of the planning you would do now would just be invalidated by the time you reach actual retirement. Instead, focus the available resources you do have where they can make a difference. Emphasize your investment skills to grow your assets by developing your financial intelligence. It is a skill that will pay you for a lifetime, and by now your assets should be large enough to justify the time and effort required.

Below are the mid-career action steps that you can add to the savings process you already put in place during your 20s:
  •  Build Your Financial Intelligence: Now is the time to begin learning more about investing and personal finance. Read books, listen to audio courses, and study the investment masters. You need to learn what works and what doesn't with investing so that you can hire smart money managers and make wise investment decisions.
The reason this is important is because the return on your assets will be a far greater determinant of your financial security than your savings abilities, and the return on your assets is a function of your investment knowledge and decision making. The sooner you learn the essential lessons the lower will be their cost in terms of investment mistakes.

By contributing to your investment education regularly you are compounding your financial intelligence just like regular contributions to your savings compound your wealth. Investing in your financial intelligence will pay you dividends for a lifetime. It is essential to a secure retirement and true financial independence.
  • Keep Accurate Records: Another habit to develop in mid-career is good record keeping. You want to run your finances like a business - because that's exactly what it is - a financial management business. Maintain expense records showing how much you spend and where it all goes so that you know how much income you need to retire securely. Keep your investment records efficiently organized and monitor the progress of your assets. Treat your money with the respect it deserves and it will respect you back by sticking around and growing in your accounts.
  • Create Your First Ballpark Estimate: Make your first attempt at figuring out how much money you will need to retire comfortably. Don't worry about doing it perfectly because so much will change between now and retirement that perfection and accuracy are impossible at this stage. All you want to do is create a ballpark estimate so that you can get your head around the size of the goal and whether or not you are on track. Determine the low end range of acceptable savings required using optimistic assumptions then determine the high end range using pessimistic assumptions. Reality will likely be somewhere in between.
  • Never Raid Your Retirement Accounts: This should go without saying, but just in case there was any vagary - you can never, ever raid your retirement accounts to support current lifestyle. If you lost your job and can't find a suitable position then take an unsuitable position but don't use retirement savings as an easy solution. If the car is broken then fix it but don't buy a new car with your retirement money. Whatever problem you face in life must be solved as if the retirement accounts don't exist. They will always appear as the easy solution to life's economic difficulties, but that will only create bigger problems for you in the future and defeat the whole purpose of saving for retirement. The truth is you would find a solution if you didn't have the retirement plans, so just assume they don't exist and find that solution anyway. Never raid your retirement accounts - never. Did I say never? Yes, never…ever.
  • Think Long-Term: Your habits will determine your success. Every day you make a choice between consuming today and delaying gratification by saving and investing for consumption tomorrow. You can enjoy a BMW or Lexus today or you can invest that money so that you can enjoy a lifetime of BMW's and Lexus's.
  • Catch-Up: If you’re 50 or older, you can contribute an additional $5,000 into your account beyond the standard IRS limit.
Similarly, you make a choice every day between the mindless rot of television or growing your financial intelligence with good investment books and seminars on CD or DVD. The habitual way you spend your limited resources of time and money during mid-career will determine your long-term financial success. It's not how much money you make that determines your financial success, but what you do with what you make. Your habits will determine your success.

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