Three Keys To A Successful Retirement Strategy

​Planning for a long and financially sustainable retirement is one of the most important things we do in life for ourselves, our businesses, and our families. In this four-part series, I will introduce the three elements you should be aware of in planning a successful retirement strategy, and examine in detail those three most important elements of a successful retirement strategy.

Saving and the Power of Employer Matching Contributions
The foundation of a successful retirement strategy is saving money. Without savings, it’s impossible to invest and create wealth. Day-to-day budgeting and expense planning, as two examples, are essential starting points in any long-term retirement strategy.

Another element of a successful retirement strategy is to leverage the benefits of matching employer contributions. In addition to motivating employees to save and educating them on the importance of not leaving money on the table, matching contributions allow employers to attract and retain better talent by offering more competitive benefits.

Volatility
The second important component of a successful retirement strategy is managing and understanding volatility, which over the course of a working lifetime plus retirement will be a constant force in the markets.

Volatility is often associated with risk. In the stock market particularly, risk is typically associated with short-term losses. But if we view investing through a longer-term lens, market volatility looks dramatically different. Over the past 30 years, the S&P 500’s value has dropped significantly several times, including the 2000 tech crash, the 2009 Great Recession, and most recently the 2020 COVID-19 pandemic. During each of these periods, the market was deemed “too risky” by many investors. Long-term investors, however, were rewarded with higher market valuations once the market bounced back which, historically, it always has. Setting emotion aside and not letting short-term fluctuations dictate long-term decision-making is the root of creating a successful retirement strategy.

Time
The third vital element of a successful retirement strategy is understanding the concept of time horizon. The average retirement age in the U.S. is between 66 and 67 years old, dependent on year of birth. Thanks to advances in health care, the average human life expectancy is now 86, which means most of us will spend a minimum of twenty years relying on the retirement savings we build.

Unfortunately, many employees and business owners overlook this fact and wait to start investing for retirement until they’re in their 40s or 50s. Others believe as they edge closer to retirement age, their risk reduces and choose to slow down or ultimately stop contributions to their retirement funds. So, what exactly is “long-term” when it comes to ensuring a financially sustainable retirement strategy and what is the “right” time horizon?

In general, most experts agree that thirty years is a prudent time horizon to plan for when considering your retirement strategy in order to avoid outliving retirement funds. In this sense, time favors the long game. In addition to managing market volatility, a 30-year time horizon to account for after retirement also harnesses the power of compounding returns if one’s retirement investments are smartly and strategically allocated. For example, $1 invested at 9% compounded interest over 30 years returns $13.27. When invested at 10%—just 1% more—it returns $17.45 (a 31.50% improvement)! Employing this type of active wealth management strategy can pay off significantly for investors over time resulting in a more financially sustainable retirement.

Join us next month as we release part 2 of this series, where we’ll take a deeper look into our first step: Saving and the Power of Employer Matching Contributions.

For more information on how First American Bank's Wealth Management Group, private bankers, and wealth advisors can help you design a long-term investment strategy or help to re-evaluate your current investment portfolio contact our wealth team.
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Disclosures

First American Bank investment products are Not FDIC Insured, Not Bank Guaranteed, and May Lose Value.
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