Stage 2: Age of Responsibility

Turning 30 years old is considered by many to be a significant life event. From a retirement planning perspective, turning 30 should mark the beginning of some serious consideration of what will happen to you in the future.

The second stage of a person's life cycle runs from the age of 30 to 45. This stage can best be described in terms of the sharp increase in responsibilities that occurs during this time.

Gone are the carefree days of your youth. Increasingly, you may find yourself using phrases like: "I've still got it;" "I don't look as old as him/her;" and "I don't feel that old." Being carded when buying liquor and tobacco purchases begins to be a blessing, rather than an inconvenience.

At the same time, a person's personal and professional responsibilities increase dramatically. People marry, start families, buy their first homes, buy stuff to fill up the first home, and otherwise begin the inevitable process of turning into their parents. Similarly, people more than likely have finished school and have started their careers.

As with each stage of the life cycle model of retirement planning, this stage provides its own unique challenges. Fortunately, the challenges at this point are fairly manageable.

Many of the individuals in this age group begin seriously thinking about retirement planning. They are still relatively young and have a substantial amount of time to save before retirement. In addition, more money than ever is being earned at this point.

Tip Given the fact that retirement is still about 20 to 35 years away, your investment plan should not be overly conservative. Ultimately, you must decide on the level of risk you are willing to bear. However, a combination of high-, medium- and low-risk investments, with corresponding rates of return, is probably the best way to go.

The major challenge facing those in this age group is staying committed to saving for retirement. There is a constant conflict between dealing with the needs of the moment and the needs of the future. Paying off school loans, supporting a family, and gathering material possessions are certainly important priorities. Just don't let saving for retirement become your lowest priority.

Consider the table below and compare it to the one presented earlier in stage one of the life cycle model. It should become increasingly apparent that the longer you postpone saving for retirement, the harder it is to make up the delay.

As the table above shows, it will cost you more than twice as much each year to reach your retirement goal if you start your yearly saving at age 40 instead of age 30. Even harder to swallow, your yearly saving starting at age 40 is five times higher than if you began to save at age 20.

Tip No matter how tempted you are to do otherwise, don't miss the opportunity to contribute to your employer's retirement plan or to an IRA. Also, if you missed out on the opportunity to save earlier, you can still make up some of the shortfall by saving more during stage two of the life cycle. You are far enough away from retirement that a smaller amount will have time to grow and benefit from the magic of compounding.