The best time to start saving for retirement is always now: the earlier and more often you consider your retirement savings, the better. But as you progress through your career and get older, different financial planning factors come into play.
When you’re younger, you may need easier access to your investments to use for things like a down payment on a house. As you get older, you may want to make safer investments that can weather market volatility in the short-term. But no matter your age, there are steps you can take to invest in your retirement and ensure a healthy financial plan.
Here are the best ways to save for retirement at any age.
Steps to take in your 20s
As you start out in your career, be sure to take advantage of employer-funded savings plans and establish healthy practices for managing your finances.
- Build a rainy-day fund of six to nine months’ worth of expenses. This will be your cash reserve for emergencies or opportunities.
- Start contributing to your company’s retirement plan as soon as possible. Strive to always contribute at least the minimum of what your company matches, and more if your cash flow allows. Set up automatic contribution increases if you can, so you’re always maximizing your savings opportunities.
- Pay off any credit card debts and always pay the full balance of your monthly statement.
- Invest in higher-percentage stocks. While you’re in your20s, the horizon for retirement planning is far off. You have lots of time to ride out the rises and falls of the market, and can invest in higher-risk stocks that yield potentially higher returns. Compounding is powerful, and it’ll take lower investments in your younger years to build a sizeable nest egg than it will if you wait to start investing.
- Consider a Roth 401(k) for tax-free growth benefits if you are going to be in a lower “effective” tax bracket.
Steps to take by your 30s
Now established in your career and forming a clearer picture of your adult life, your thirties are the time to plan for any family needs and start investing strategically.
- If you’re purchasing a home, strive to put at least 20% down to avoid private mortgage insurance (PMI) costs.
- Get systematic about your savings by opening an investment account outside of your retirement plan. Ideally, have your contributions come directly out of your checking or savings account on a regular basis.
- Consider more stock-focused investments if you have cash funds you won’t need for at least five years.
- Utilize other employer benefits like long-term disability and life insurance to make sure any potential risks are covered.
- Address your life insurance needs. What level of coverage would your family need if you were to pass away prematurely? Review your insurance options and develop a cost-effective plan to cover your risk.
- Review your personal insurance coverage for any cars, your home, and personal liability to make sure you and your assets are protected.
- Save for your children’s education by starting a 529 plan. Age-based portfolios are a good way to stay ahead of the rising cost of college.
- Create a will and estate planning documents.
Steps to take by your 40s
At this age, ideally the only debt you have remaining is a low-interest-rate mortgage. Take advantage of this more secure financial stage to:
- Maximize your retirement savings to the IRS-allowed limits.
- Consider your tax bracket and weigh the benefits of contributing to a Roth (after-tax contribution, but tax-free growth and distributions) versus traditional (tax-deferred contributions and growth, but distributions are taxed as ordinary income).
- Contribute to a Health Saving Account (HSA) if available to you.
Steps to take by your 50s
As you near retirement, it’s time to mitigate your financial risk and plan for the long-term.
- Take advantage of “catch up” features in retirement plans and IRAs. These features allow for an additional $6,500 contribution for 401(k)s and $1,000 contribution for IRAs.
- Invest in growth-focused investments if your risk tolerance and timeframe allow (five or more years until you need the funds). As your timeframe shortens, adjust your portfolio to balance the risk of downturns in the stock market with bonds or stable-value investments.
- Add investments with downside protection to safeguard you in case the stock market makes an unexpected, significant decline.
- Consider you potential long-term care needs. Certain insurance policies allow you to purchase coverage that can be paid up in ten years. It may be best to purchase these while you’re still working and earning income rather than when you retire.
No matter your age or investment decisions, you should monitor all of your investments at least annually to stay on top of your financial plan’s performance. Every individual and financial plan is different, and if you’re unsure how to save in order to achieve your goals, consider working with a financial adviser to get on the path to a secure financial future.
Faron Daugs, CFP, is founder & CEO of Harrison Wallace Financial Group.