5 Things to Do Now to Retire in 25 Years

Checklist to Retire in 25 Years

1. Find ways to grow your income
2. Hone your spending priorities
3. Invest aggressively in a globally diversified portfolio
4. Put your retirement investments on autopilot
5. Build out nonretirement accounts

Susan Dziubinski: Hi, I’m Susan Dziubinski, and welcome to a new miniseries from Morningstar called Your Retirement Countdown. In this four-part series, we’re sitting down with Christine Benz, who’s Morningstar’s director of personal finance and retirement planning. We’re talking about some of the key things you need to do to retire comfortably based on how far away your retirement date is, whether it’s 10 years away, five years away, or just one year away. In today’s episode, we’ll focus on what to do if your retirement is 25 years away—and you don’t have to take notes, because we’ll give you a checklist of to-dos at the end of our interview. Christine, great to see you.

Christine Benz: Susan, it’s great to see you always.

Dziubinski: Now, the focus of our conversation today is wrapped up as 25 years, but there’s probably kind of a range in there. What is that range to retirement we’re talking about today?

Benz: Yeah, it’s not an exact science, Susan, but I would say anywhere from 15 to 30 years from retirement is the zone that we’ll be in today. So certainly not people who are on the precipice of retirement, not newbies, but people who are in that middle range. I would say a rough age range would be if you’re between the ages of 35 and 50.

Growing Your Income While Retirement Planning

Dziubinski: OK, that makes sense. Let’s get onto your checklist to the five things we need to be doing at this stage. Now at Morningstar, of course, our focus is more on investing, but you think the priority for people at this life stage, presumably about midcareer, is really growing their income. What do you mean by that, and how do you do it?

Benz: There are people who try to get themselves to retirement with extreme frugality. You hear about the lean FIRE movement, for example, but if you can find ways to grow your income, everything gets easier in terms of your retirement plan. Savings gets easier, obviously, your job might get more interesting. So the idea here is to invest in additional training. You still have time to recoup any investments that you may make in that additional training. Raise your hand for additional responsibilities. The key is to keep your skills growing, keep your income growing. You can save more. You can absorb shocks, like the inflationary shock that we’re living through currently. You can potentially retire earlier if you are able to grow your income and save more. So I would focus on that as job one in this retirement savings path.

Setting Spending Priorities When Saving for Retirement

Dziubinski: Your next to-do on the checklist, if the retirement is, again, about 25 years away, is setting spending priorities. How should people be thinking about that specifically?

Benz: Lifestyle creep is the evil twin of growing your income. If you’re earning more, you probably will have an appetite to spend more. But the key for people on their retirement journey is to be focused about the categories of spending that they really care about and try to shut out the things that they don’t care about. For me, I’ve never cared about cars. I’ve always been one to take a hand-me-down car from my husband and drive it for a long time. Other people might really care about cars, and that’s fine. But the key is to be focused, to not just jump on that treadmill. We do live in a very consumerist culture. It’s tempting to just mirror what people around us are doing. But to the extent that you can focus your priorities, it does make that retirement savings journey a little bit easier, or a lot easier, I should say.

Investing for the Time Span

Dziubinski: Let’s move on to investing, which is your third to-do, focused on what a portfolio should look like at this life stage. You think a key here is to make sure, is to really focus on that asset allocation and making sure that it’s aggressive enough. So talk about that.

Benz: You still have a long time horizon to retirement. You can still benefit from the higher returns that stocks have historically delivered. For people at this life stage, I think holding 90% of their portfolio in equities is appropriate. If you look at target-date funds geared toward people at this life stage, that’s roughly where they are. And you’re looking for a globally diversified portfolio. So, not just US stocks, but maybe 60/40 US versus non-US, I think, is a good target. Again, if you have a target-date fund, that’s a terrific way to invest. But the key is that you are taking ample equity risk. You’re also holding an emergency fund to help absorb any short-term shocks that your household might encounter on the spending front, but your retirement portfolio is invested quite aggressively. And you’re also, Susan, keeping tabs on idiosyncratic risk.

Some people have employer stock. You want to make sure that you’re divesting yourself of that appropriately and tax efficiently. You might get some tax advice there, but you need equity risk. You don’t need big dumb risks in that equity portfolio. And you also want to bear in mind your own human capital. So if you’re someone who has a volatile earnings trajectory, maybe you’re a commissioned salesperson, for example, and your income tends to be lumpy. In that case, I would probably hold a little bit more in safer assets outside of my retirement accounts to help absorb any shocks in my income that I encounter.

Automating Your Retirement Investments

Dziubinski: Now your next to-do is interesting because it seems a little counterintuitive, and you think people at this life stage should do their best to actually ignore their investments. Talk a little bit about what that means and how you can be more of a hands-off investor at this stage.

Benz: Right. Putting everything on autopilot is such a great practice. And of course, this is how we invest if we’re using a 401(k) plan or another company retirement savings plan. The investment provider comes into our account, takes out our contribution on an ongoing basis. That’s a terrific way to invest because it instills discipline. Most people don’t override their contributions. If the market seas get a little bit rough, they just tend to continue on with those contributions. And so I would say mirror that system in your other contributions that you’re making. So if you’re making IRA contributions, set it up so that you’re making monthly contributions until you hit that limit. If you’re contributing to a taxable account or a 529 account for your kids, just set up those contributions on autopilot. It frees you up to focus on your career. You’re not having to worry about making those investment contributions or when to make them.

It gives you time for other things. I think it’s a terrific practice. It also makes spending decisions a little bit easier because if you set up your contributions at an adequate level, really, what’s left in your accounts is there for you to spend. It’s called reverse budgeting. I think it’s a terrific practice to adopt.

Investing in Nonretirement Accounts

Dziubinski: And then your fifth and final to-do is to start building out nonretirement accounts, which you just mentioned. What kind of accounts are you talking about, and why is that important at this stage?

Benz: There are ancillary retirement savings vehicles that you could consider. A health savings account would be one. A best practice for health savings accounts, if you can afford to do it, is to use non-HSA assets to fund your healthcare expenses as you incur them. Just let the money build up in your HSA, get it invested in something long-term. That’s something to consider for people who are covered by a high-deductible healthcare plan. For most people, another savings vehicle that will make sense would be that taxable brokerage account. So it’s not a retirement account. You’re not getting any tax breaks on that account, but the beauty of it is a lot of flexibility in terms of what you invest in and in terms of the ability to take out your money whenever you need it. So if you need to retire early, those reserves that you have in the taxable brokerage account will be super valuable.

The key there is that you need to be thoughtful about what you’re investing in. You can’t put any old thing in a taxable brokerage account because if you invest in something that’s making a lot of income distributions or capital gains distributions, that’s going to drag on your returns. So here, if you’re thinking about retirement savings, index funds, exchange-traded funds are your friend, equity exchange-traded funds and index funds, because they have very limited tax drag on an ongoing basis.

Dziubinski: Well, Christine, these sound like five great to-dos if your retirement’s 25 years away. Thanks for your time today.

Benz: Thank you so much, Susan.

Dziubinski: As we promised, here’s the recap of your checklist of to-dos if you want to retire in 25 years. First, find ways to grow your income. Second, hone your spending priorities. Third, invest aggressively in a global diversified portfolio. Fourth, put your retirement investments on autopilot. And last, build out nonretirement accounts. Now, if you’d like to get more insights about your retirement from Christine, sign up for her free weekly newsletter, Improving Your Finances. You’ll find a sign-up link below. Thanks for tuning in.

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