No matter your age, here's how to tell if your finances are on the right track
Individual circumstances make everyone’s journey slightly different, but no matter your age, there’s always a vision. You can change it over the decades, but at least you have something to aim for and an idea of where you stand about that goal. Include a margin of error because no one knows what life will bring. This path and the choices you need to make — will look different depending on your age, what life-altering moment you’ve experienced, and the lifestyle you want. A baby or an empty nest, a new business or a business failure, divorce, or illness can all alter your ability to save. Retirement, of course, is one of the biggest financial goals. There is no one answer about how much money you’ll need or how to go about it
These suggestions can help you get there, no matter what stage of life you’re in:
- The 20s
Retirement seems so far away. But this may be the most crucial time to start saving for it, as those in your 20s can benefit most from the power of compounding. That’s when an account’s returns and interest grow atop itself every month, year after year, decade after decade.
Paul Merriman has an eye-opening explanation of how you can turn yourself into a multi-millionaire by saving for retirement for just five years if you start at 25 and do nothing after that. Of course, this is also the time when you’re probably earning the least amount of money in your career, and the budget may be tight. You may be balancing several money goals and obligations.
Still, here are some tips to get your savings on track:
- Financial advisers typically suggest putting away between 10% and 15% of salary for retirement. If that’s not possible, start with the bare minimum, no matter what that is, even if it’s just $5 or $10 a month. When you get a raise or a bonus, increase the amount.
- Consider automatic contributions into a retirement account straight out of your paycheck.
- If you have access to a 401(k) with an employer match, try to qualify for the match. There may be some conditions, including how long you need to be working there, but think of it as free money. Why not take advantage of that?
- This may also be the time to invest in a Roth account funded with after-tax dollars because workers at the very beginning of their careers typically have the lowest salaries and may anticipate being in higher tax brackets when they retire.
- Don’t forget to set aside some money for emergencies!
- The 30s
This is the decade when you may be buying your first home, getting married, building a business, starting a family. That’s a lot of financial obligations.
Ideally, a 30-year-old should have twice their salary at this point, according to one guideline from Fidelity Investments. However, many say that’s not feasible, not with rent and mortgages, student loans or kids’ college funds, assistance for their parents, and other bills to pay. So if you are living paycheck to paycheck or close, you should still try to allocate something to a retirement account and then make a promise to increase that contribution when the budget allows.
Try these tips in your 30s:
- Reassess your budget and if there’s spending that doesn’t align with your values, cut out those low-priority expenses.
- Look for ways to boost your income. Find a higher-paying job or take on a side gig? Even some one-time cash by selling unwanted belongings, however small, can boost retirement savings.
- Diversify your retirement accounts; if you have access to a 401(k) at work, take advantage of it, especially if there’s a match. If you can save a little extra, consider opening a Roth IRA.
- The 40s
This is the decade when you may be seeing more money in your paychecks, thanks to raises or job changes. And retirement suddenly doesn’t look impossibly far away. Of course, financial obligations don’t disappear in the 40s—there’s likely still a mortgage to pay, children’s college funds, perhaps elderly parents to assist…the list goes on. But the goal should be to put away 10% to 15% of your salary for retirement and throw in a little extra cash from raises or side gigs.
If you haven’t already started investing outside of a 401(k) or IRA, now is the time. There are less-stringent tax consequences when withdrawing money than with a 401(k) or IRA, which provides you with breathing room in a crisis like a health scare or a layoff.
Consider doing this:
- Pay attention to lifestyle creep. Salaries often go up with age, but if you can avoid growing your expenses in line with those higher earnings, you can supercharge your retirement accounts. Again, review subscriptions and memberships, reduce spending on items and services that aren’t worthwhile, and put that extra money to work for your future.
- Set up important documents, such as wills and healthcare proxies. A lot of Americans think they don’t need estate planning if they’re not millionaires, but that can’t be further from the truth. Without this, a judge will decide how your assets are distributed or who cares for minor children should you die. If you already have these documents, take the time to review them.
- Look over listed beneficiaries on retirement accounts and life insurance policies, too; you don’t want those benefits going to the wrong person.
- The 50s
Now retirement really isn’t that far away. So spend more time thinking about when you want to retire and what your expenses might be. Take an honest look at your finances. Estimate your Social Security benefits using a My SSA account with the Social Security Administration, and run a few scenarios of retirement income and needs. Retirement accounts allow catch-up contributions for people 50 and older, so take this opportunity to increase your savings.
Try these tips in your 50s:
- Keep analyzing your spending (this is one of those perpetual rules of thumb in the personal finance world!)
- Talk with a financial planner, or even an adviser at the firm housing your retirement accounts if you don’t want to work with a professional more closely to review your asset allocation.
- Create a My SSA account, which allows you to see an estimate of your Social Security benefits as well as review your work history. As a bonus, this can protect you against identity theft.
- The 60s & 70s
These are the decades when most people want to stop working. While you may not control the timing, you still can do plenty to secure your finances. Don’t go into retirement blindly. Analyze your income sources in retirement: Social Security, savings (including retirement accounts), pensions, and anything else. Think carefully about when you will claim Social Security. People can begin receiving their Social Security benefits at age 62, but not everyone should. Americans who paid into the system and are fully covered get 100% of their benefits at their Full Retirement Age, which depends on their birth date. Those who claim prior to their FRA get a reduction for every month before that FRA, while people who delay their benefits up until age 70 get a bonus. Not everyone can afford to wait for Social Security benefits, even for one year. Just know that the decision, whatever it is, also impacts spousal and dependent benefits. This is also the time to investigate the cost of healthcare. After all, Medicare, which becomes available at age 65, is not free. People retiring prior to 65 should build health insurance into their budgets while waiting to be covered under Medicare. And just because retirement is here doesn’t mean portfolios should become primarily invested in bonds. Yes, retirees need the protection fixed assets to provide, but retirement can last another two or three decades. Without a healthy mix of stocks and bonds, you may run the risk of running out of money in old age.
Do this in your 60s and 70s:
- Take account of all of your assets and liabilities — and the type of any debt you have. For example, a reasonable mortgage isn’t necessarily bad in retirement if it fits into the overall budget and spending plan, but consumer debt should be squashed before retiring.
- While in your early 60s and healthy, consider long-term-care insurance. Not interested in that type of policy? That’s fine, but have a plan for how you’ll pay for at-home aides, nursing homes, or other long-term care needs.
- Focus on your health, not just your finances. Stay active, learn a new skill, take on a hobby, call up family and friends.
- Maintain a comfortable portfolio mix, one that isn’t so conservative that investments no longer grow over the next few decades but one that isn’t so risky you could lose all your hard-earned savings.
- The 20s