Investing For Retirement? Be The Turtle, Not The Hare

This article originally appeared on Motif Investing.

When it comes to saving and investing for a secure retirement, perspective matters. Some investors approach reaching their target savings number as a sprint but the problem is that in doing so, they may be letting other financial goals fall to the wayside.

Looking at your retirement plan as a marathon, on the other hand, allows you to pace your savings and create balance financially. If you’ve been trying to build your retirement foundation at breakneck speed, here’s how you can adopt a “slow and steady wins the race” mindset instead.

Make your emergency safety net a priority

An emergency fund is one of the most important financial resources you can have but a surprising number of Americans are living without one. A September 2016 survey revealed that 69% of Americans have less than $1,000 set aside for rainy days.

If you’ve been neglecting growing your emergency savings in favor of maxing out your employer’s retirement plan or an Individual Retirement Account (IRA), you could be setting yourself up for trouble if life takes an unexpected turn.

Let’s say you lose your job, for example, and you have no emergency savings to fall back on until you get back to work. In that scenario, you may be tempted to cash out your 401(k) to cover the gap until you have a steady paycheck coming in again. Doing so, however, penalizes you in more ways than one.

First, there are the tax implications to consider. With a few exceptions, withdrawals of 401(k) plan funds before age 59 1/2 incur a 10% early withdrawal penalty. The distribution is also treated as taxable income. That can make draining your 401(k) to cover an emergency very costly in the short-term.

You’re also losing out on potential growth by tapping your plan early. Let’s say you’re 35 years old and you’ve fast-tracked $150,000 into your 401(k). If you never contribute another dollar, you’d have nearly $904,000 by the time you reach 65, assuming a 6 percent annual return. That’s a good reason to leave your retirement assets alone and work on getting your emergency fund up to par.

Leverage annual raises strategically

The Economic Research Institute projects that wages will rise by approximately 3 percent for American workers in 2017. If you’re anticipating a boost in pay this year, you may be tempted to redirect all of that money straight to your retirement plan but not so fast.

If you have debt, for example, it’s important to compare what it’s costing you in interest to how much more you stand to gain by diverting your entire raise to retirement. Consider this: in 2016, the typical American household was saddled with just over $16,000 in credit card debt and $49,000 in student loan debt.

While student loans are often considered “good” debt because of their lower interest rates, credit cards tend to be much more expensive. As of January 2017, the average credit card APR was 15.42%, which is well above the roughly average 10% annual return yield by the S&P 500 since its inception.

Ramping up your debt payoff using the extra funds from a raise may be the better strategy if the debt is costing you more than your investments are earning in returns. At the very least, you could consider splitting the difference and putting half of your raise towards debt and the other half towards retirement.

Don’t underestimate the value of consistency

Maxing out your retirement accounts each year isn’t a bad thing but it’s all about context. Pushing to save as much as possible in the first six months of the year, for example, may leave you feeling strapped for cash until you reach midway point. If you have a longer time frame until you reach retirement age, consistency, rather than a higher savings rate, can be a more powerful tool for creating the kind of wealth you’re after.

For example, a 2015 Wells Fargo study found that among savers aged 40 or older, those who had chosen to be consistent with funding their retirement accounts had $100,000 more in savings versus workers who saved sporadically, regardless of how much they contributed. Workers who started saving at age 31 had three times more money in their 401(k) plans than workers who waited until age 37 to get started.

Take a look at not only at how much you’re saving in your retirement accounts but how you’re making those contributions. If you’ve been front-loading your accounts, pulling back and making level contributions throughout the year can give you more breathing room financially so there’s less pressure to play catch-up with your other goals.

Be smart about asset allocation

The right asset allocation is critical and where you’re at on the retirement path influences how much risk you should be exposing yourself to. Choosing to invest 100% of your retirement funds in stocks in your 20s, 30s or 40s is one way to potentially generate higher returns but your portfolio may be dealt a serious blow if the market experiences a downturn.

Balancing out stocks with more conservative investments gives you a cushion of sorts if the market goes south. At the end of the day, you’re not bulletproof and neither is your portfolio. Your future self may thank you for choosing to hedge against volatility today, even if it means moving from a gallop to a trot in terms of how quickly you’re growing your nest egg.