Smart Financial Steps for Each Decade of Life
What milestones does your financial timeline include? The answer will depend on your situation, but there are a few financial steps you will want to take as you pass through each decade of your life. Some steps will help you avoid pitfalls and others will enable you to take advantage of opportunities.
Tackle Your Twenties: Believe it or not, your twenties are the best years to begin saving for retirement. It may be the last thing on your mind, but placing money in a tax-advantaged retirement account that lets you direct money into equities will help you build a solid foundation that will continue to build during times when you can’t contribute as much. Through equity investing, your money may grow and compound profoundly with time – and at this stage in the game, you have plenty of time on your side.
To help you visualize how saving now will lead to great rewards later in life, imagine this: at the age of 25, you begin setting aside $5,000 each year, for 10 years, into a retirement account that consistently earns 7%. When you reach the age of 35, you have started a family and are paying on a mortgage so you stop contributing to the account altogether. Despite the fact that you stopped contributing at the age of 35, your $50,000 could grow to $562,683 by the time you are age 65. If you were able to contribute $5,000 annually to the account for 40 years, your account could have a $1,068,048 balance by the time you reach 65.
During your twenties, you can also begin building a savings account that will provide a buffer for emergencies. There are two rules of thumb as to how much you should have in this type of savings account: 1) an amount equivalent to six months of your current salary, or 2) an amount equivalent to three months of living expenses. Bottom line, the emergency savings account is there to help you manage financial obligations during unforeseen crises like disability, illness, layoffs, family matters, etc.
Hold Tight During Your Thirties: Times are changing but the thirties are, historically, the years when people marry and start a family. This is an expensive time in an investor’s life, so saving can often fall by the wayside. I’m going to encourage you to hold tight during these years. Continue saving as much as you are able to, despite life’s demands, to meet your long-term financial goals.
Other items on your to-do list during this time include creating a will and a financial power of attorney in case something traumatic happens. You will also want to invest in life insurance. You are still young enough to enjoy low rates and (depending on the life insurance policy you choose) build cash value.
Enjoy the Revolution of Your Forties and Fifties: During these two decades, you may be emerging from the parenting stage of your life (peak spending years) while enjoying a healthier salary (peak earning years). As with your thirties, you’ll want to keep saving for retirement. If you have teenagers under your roof and have not already begun saving, you can start now. The last thing you will want to do is dip into retirement to pay school bills, so save as much as you can and borrow what you must.
This is also the time to begin thinking about long-term care insurance. Long-term care is expensive, so you will want to shop around and consider your options carefully. If you are wealthy, or expect to be, long-term care insurance can save you money if you need nursing home care as you age. For those earning a middle class income, the expense may be worthwhile if your family history indicates a need for long-term care. If you choose to buy long-term care insurance, it’s best to lock in a rate before you turn fifty and while you are still in good health.
Keep the Ball Rolling in Your Fifties and Sixties: this is the time to save. Ideally, your children are off to college and you’re making more than ever. Many retirement accounts allow you to sock more away during these years through higher contributions or catch-up contributions after you reach fifty. At the same time, you may want to reduce the risk tolerance of your investment portfolio (but talk to your financial advisor before you change your portfolio risk level). Finally, start thinking about when you want to retire. You can even set a date. You will want to reduce or eliminate your debt by your retirement date so that you can live as stress free as possible thereafter.
The Final Word: setting the stage for a comfortable retirement does not mean neglecting your current life. I encourage you to live your life to the fullest and invest your money in the things and activities that bring you fulfillment now. However, you should always keep your future self in mind. By consistently directing a portion of your money to your retirement, throughout all of the stages of your life, you will ensure a comfortable retirement for yourself.
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