Your Foundation Years
Your focus should be on developing good financial habits during this stage. Make sure you (l) live within your means and avoid accumulating consumer debt, (2) establish a cash reserve for emergencies, (3) get a plan in place to pay off college loans, and (4) begin to build your investment assets by using an employer-sponsored retirement plan or IRA.
Your Accumulation Years
The next stage involves accumulating assets for large financial goals like college education for your children and retirement. Obviously this process starts slowly, but it ramps up as you reach your peak earning potential and your children leave home. In addition to “how much” to save, you want to focus on “where” to save and build a mix of taxable investments, tax-deferred accounts (e.g. 401(k)s, 403(b)s, Traditional IRAs), as well as tax-free accounts (e.g. Roth IRAs, Roth 401(k)s).
Your Pre-Retirement Years
During the 5 to 10 years before retirement you should tighten up your retirement plan, make sure you’re saving enough, and start to get an idea of how you’ll make the switch from accumulating a nest egg to living off of that money in retirement. These years are very important because people are generally at the top of their earning potential and can make up for getting a late start if they plan accordingly.
Your Retirement Years
A big mistake that many people during this stage is being too conservative with their investments and forgetting that they might have another 30+ years of inflation to deal with in retirement. During retirement you should have a strategy in place that will give you the secure income you want as well as the growth potential you’ll need to keep up with inflation over time.
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