Everyone has their own story—where they come from, what they value, educational and professional journeys, etc.
All of our experiences shape who we are and what we value, and no one said that those things had to stand still.
So why would saving for retirement remain the same throughout your life?
Here’s a hint: it doesn’t!
Saving for retirement is a dynamic, long-term process that changes as you move through life. Today, we’ll tackle some core retirement planning questions like,
- How do you know if you are “doing the right things?”
- What “milestones” should you hit throughout your life?
- Are there ways to optimize your retirement savings journey?
No matter where you’re starting, we can help you along the way. Read on for tips on how to start or continue saving for retirement. Let’s dive in!
- Your retirement savings plan should be custom to you and your goals.
- Investing for retirement will take new shapes throughout your life.
- If you haven’t started saving yet, it’s not too late!
- A financial advisor will be a great ally to help you reach your financial goals and navigate the best ways to save.
Retirement Saving Tips in Your 20’s
When you’re young and retirement feels like a lifetime away, you’ll always have reasons to put saving on the back burner. How could you possibly start saving for retirement with an entry-level salary, costly rent, student loan debt, expensive trips, etc.? You may also feel like you don’t make “enough” money to start saving yet.
But you can!
While it might not seem like it now, it might be easier to save at this point in your life rather than later. For example, you may not have dependents, a mortgage, etc., so capitalize on that!
We understand that contributing to a 401k might seem unreasonable or unattainable if you’re struggling to cover rent or make student loan payments. But, the longer you put off saving, the more it’ll set you back in the long run (hello compound interest!). Whatever money you can put away helps (more on that later)!
How can you earmark funds for retirement in your 20s?
Start With Employer-Sponsored Retirement Accounts
If your employer offers a 401k, sign up! The money you contribute to this account goes in before the government can tax it (payroll, Medicare, Social Security, etc.). Since the funds are “pre-tax,” you lower the amount of money the government “counts” toward your tax bill come April.
Additionally, some employers also offer a contribution match, which is essentially free money. Who doesn’t want that?
The money in your 401k grows tax-free until you withdraw it at retirement. At that point, you’ll be taxed. But, the more money in the account, the faster your funds will grow!
Starting to save early offers a huge advantage in terms of your account growth. By saving a little now, you’ll have big rewards later, thanks to compound interest. Let’s look at an example using a 401(k) calculator.
Say you’re 22 and just landed your first job out of college. The starting salary is $50,000, and your employer offers a 50% match up to 6%. You decide to start by contributing enough to get the full match, so 6%.
By the time you retire, you’re looking at nearly $1.4 million!
If you’re contributing to your 401k, what should you actually invest in? While your allocation depends on several factors (goals, risk, time horizon, etc.), generally, you can afford to take on more risk in your 20s. The reason is that you have a longer time horizon before you need the money—over 40 years—so you have plenty of time to recover from market dips and take advantage of significant gain opportunities.
Save For Emergencies
One last thing, it’s essential to set up an emergency fund during this time in your life. The general target is about 6 months' worth of your living expenses in a safe, highly liquid account like a high-yield savings account. By stocking up on emergency money, you won’t have to rely on a credit card or, worse, your retirement savings for any unexpected expenses.
Bonus tip: Prioritize saving in Roth accounts, like a Roth IRA or Roth 401k. You fund these accounts with after-tax dollars, so you don’t get a tax break when you contribute, but the earnings and distributions are tax-free. Investing in these accounts when you’re younger can be great because you’re paying taxes at a lower rate than in the future when you’re earning more money.
Keep Building Healthy Investment Habits in Your 30’s
Your 30s are an important decade for growth, both personally and professionally. With more professional experience, you’re likely earning more money than you did in your 20s and may have additional financial responsibilities, like a mortgage, car payment, kids, or other debt.
How can you leverage your retirement savings in your 30s while balancing your other financial responsibilities?
Double Down on Retirement
First, if you haven’t started saving yet, it’s not too late! You still have another 35+ years to accrue interest on your investments prior to reaching retirement age. But it’s important to start now.
Again, if your employer has a 401k (and, even better, a contribution match), take advantage of it! Since your salary is likely higher than a decade ago, now could be an excellent time to try and max out your retirement accounts.
In 2022, you can contribute $20,500 in a 401(k). To reach that goal, you’ll likely need to contribute anywhere from 10% to 20% of your salary. While that may seem like a lot, maxing out your retirement accounts is an excellent way to set yourself up for future success.
Additionally, you may have switched jobs, so it’s possible that you still have a 401(k) sitting with your old employer. A great way to bring more intention to that account is rolling it over either into your new company’s 401k (if it has a good plan, minimal fees, and solid investment selections) or an Individual Retirement Account (IRA).
Don’t Forget About Debt.
While saving for retirement, you also want to create a solid debt-repayment plan. If you need help paying off your debt to ease your retirement savings efforts, consider refinancing any loans or discuss lowering the interest rate with your lender.
But how can you do both?
In most cases, you’ll be able to create a plan that has you saving for retirement and paying down debt simultaneously, with one taking priority over the other depending on your circumstances.
For example, if you’re only making the minimum payments on high-interest debt, like credit cards, and contributing to retirement, you might be “robbing Peter to pay Paul,” so to speak. Essentially, the high compounding interest on your debt likely negates any savings efforts you’re making.
In a case like this, it might be best to pay off the high-interest debt first, and once that’s all paid off, start contributing to retirement again.
Remember, you don’t need to be debt-free to save for retirement!
Build Momentum in Your 40’s
In this life season, you're starting to reach your peak “earning years.” And with that, hopefully well on your way to achieving your savings goals!
However, don't be discouraged if this doesn’t sound like you. There is STILL time!
You may be in a situation where you feel like you could be saving more or don’t have a good investment strategy overall. This is where we come in!
Retirement Savings Milestones
Now’s the time to maintain your retirement-saving momentum. It’s essential to stay the course, even with multiple financial priorities. Here are some ideas to help!
First, consistently max out your retirement savings vehicles. In your 30s, maxing out may have been a goal, but in your 40s, it should develop into a consistent practice. If you have spare funds, you may check if your employer allows after-tax contributions.
After-tax contributions allow you to contribute over and above the $20,500 annual maximum up to $61,000 in 2022. Keep in mind that number includes your and your employer’s contributions. After-tax contributions open up several planning opportunities like Roth conversions so that you can fill up your tax-free retirement investment bucket.
In your 40s, you also want to consider investing outside retirement. You have other goals to save for! Here are some ideas:
- Brokerage account (a flexible account you can use for any savings goal)
- HSA (health savings account to help you invest for medical expenses)
Balancing Competing Financial Priorities
This season of life can be tough because you might be nearing some high-cost expenses, like a child going to college, purchasing a vehicle for your young driver, medical expenses, etc. If this is the case, work to get rid of your debt so you can save more.
Your saving strategy will look different based on your previous years of retirement account contributions. For example, if you’ve been saving since your 20s, you might not have to make much change to reach your savings goals. If not, you might have to push hard to reach your goals.
It’s not impossible! But, it likely means reducing your spending and potentially making difficult choices. An advisor will be a great ally for you throughout this process. We can work together to find the right investment mix with an appropriate level of risk to get you in the right direction.
Insurance Is Key
As you’re building wealth, don’t forget to protect it along the way. Your 40s is a good time to review (and potentially add to) your insurance coverage.
- Do you have enough life insurance? What about your spouse?
- Would you benefit from personal liability (umbrella) coverage? This type of insurance protects you if someone were injured on your property or accidental damage you are legally responsible for on someone else's property, like if your child got into a car accident and you own the vehicle.
- What about disability insurance? Pro tip: you might find cost-effective group rates in your benefits package. Be sure to check it out during open enrollment.
We can work together to evaluate if you have enough coverage to protect yourself.
Define Your Retirement Savings Strategy
Remember, saving for retirement is personal because your vision for retirement is personal. Where you want to live, what you want to do, who you want to do it with, and more are all significant parts of your unique savings strategy.
Someone who aims to retire early will require a different emotional and strategic approach than someone who plans on working, even part-time, for as long as possible.
At AVID, we work with you to create a Purpose-Driven Money System that can help you understand what’s most important to you and give you the tools to bring your vision to life.
We’d love the opportunity to hear where your goals and learn how we can help you reach them. Please set up a time to meet with us today.