No matter what your age, it is never too late or too early to start saving for retirement.
Each age comes with different life obstacles and expenses that can often derail a good savings plan. So, in this article, we will walk you through how best to save at different points in your life. It may feel like your nest egg is growing too slowly, but time and perseverance can get you where you want to be.
Did you know only 55% of retiring Baby Boomers have saved for retirement, and of those, the majority have under $250,000?[i] That leaves very little cushion for unforeseen expenses considering you may well live at least three decades during retirement years, it’s good to plan ahead.
One of the best ways to continue to save is to set up small goal markers to help you feel that you are making progress along the way. Hitting the small goals can keep your stamina up, especially when finances are tough or when something comes along that derails your plan.
Goals by Age
If you are in your early twenties, there is a good chance that you are a recent college graduate, with some debt, and that you are in an entry-level position. Rent and basic living expenses are probably eating up the bulk of your paycheck, leaving you little to save.
- You should work toward having a fully-funded emergency fund. This emergency fund will help to cover any unforeseen and unexpected expenses. Save enough to pay for your living expenses for at least three months. It is often an emergency that wipes out a savings account, so saving for this first, will make a difference.
- Next step is getting proper health insurance, investing in your health early on will have huge ripples down the line. Regular exercise and checkups, dental exams, etc. are just as important as your bank balance.
- Lastly, this is the time to take advantage of any employer offered 401(k) plan or employer match programs. Make the contributions big enough to receive the maximum matching from your employer and follow the out of sight/ out of mind method, a little is taken out each paycheck and socked away to grow. The earlier you start, the longer your investments have to grow. While your income is still relatively low, consider choosing Roth 401(k) contributions instead of pre-tax contributions. If you can save more, save and invest it in a Roth IRA account.
In your thirties, you have been working for some time, ideally, you have moved up in wages. You may now be married, or have a family, or are looking to buy a home. The twenties were about finding stability, the thirties have to now be about looking further ahead. The first order of business is getting rid of your debt especially student loans and credit cards. These are, typically, high interest, aggressive debts, that will only grow the longer you pay the minimums. It may be time to seek outside help, like speaking to a debt specialist or using an online program. If you are thinking about buying a house, you will also want to be saving for a down payment. Ideally, you want to have 10-20% to put down. If you have children, setting up 529 plans to help save for their education may also be helpful, as that money grows tax-free and is earmarked specifically for schooling. This is also the time to draft up a will and get a life insurance policy, especially if you have dependents. By this time, you should also be saving 10-15% of your annual income.
By your forties, you should be even more established in your life and career and this is a critical decade for long-term saving. Some good goals are to eliminate any debt that isn’t tied to a mortgage. Try to pay off any credit cards, car loans, or student debt. Start planning for how you will pay for your children’s college education. Ideally, you started 529s in your thirties (see above) and have been regularly putting money away. It may make more sense for your children to take out their own loans, especially if you are coming late to the savings game, or are trying to pay off debts. This is the time to look over your finances, getting serious about college expenses and talking to your children about what you can afford and what their expectations for assistance from you should be. It’s important to be honest and realistic with them. By this time, you should also have twice your annual income saved, in addition to a separate emergency fund.
By your fifties, you should be well on your way to saving and looking ahead. At work, you should be maxing out any employer contributions. This is also a great time to meet with a financial advisor to have them look over where you are and where you want to be and help you get on track. If you hadn’t been saving as much as you’d wanted, this is also the time to start playing catch up. If you are age 50 or older, you can contribute a maximum of $6,000 more, or $25,000 total in a 401(k) plan. In addition, you can contribute a maximum of $1,000 more, or $7,000 total to an IRA or a Roth IRA, unless your taxable compensation is less than $7,000. If you are out of consumer debt, in a good place with your savings and college costs, this also may be a good time to pay extra toward your mortgage with the goal of paying off your home sooner.
If you are on track with your retirement savings, consider looking into long-term care insurance to reduce potential costs of paying for long-term care. You can share the risks with an insurance company so that you don’t let your own long-term care event destroy you and your spouse’s retirement savings. It’s much cheaper to buy this insurance in your fifties when you are relatively healthy.
With retirement closer than ever, this is the time to make good choices that will affect your long-term retirement. With that in mind, this is the time to again meet with a financial planner and go over your long-term goals and the likelihood of reaching them. This is also the time to start considering if and when you will downsize, where you plan to retire, and what you will do with that time. This is also the time to review all of your important documents to make sure they are current including your will, your life insurance, and anything with a named beneficiary. If you haven’t bought long-term care insurance for you and your spouse, now it’s the time to review this topic as Medicare does not cover long-term care and it can cost upwards of $48,000 a year for assisted living and over $80,000 for long-term nursing care with those numbers set to keep climbing.[ii] If you are behind on your savings, this is the time to take advantage of any and all catch-up options and to pay off any outstanding debts while you still have a regular income.
No matter where you are, getting serious about your financial future is important. What you do now can greatly affect your future. Taking a little time to create a plan and a goal can make all the difference down the line for you and your family. You don’t have to do it alone. Start searching for the right financial planner to partner with by using this search function of the Financial Planning Association: http://www.plannersearch.org/.