Are You On Track for Retirement?
What do you think of when you think of retirement? If youâ€™re in your 20s or 30s, the word retirement may conjure images of lounging on a beach or perhaps living in a nursing home. Maybe you think retirement is something only done by old people.
The truth is that retirement doesnâ€™t have to wait until youâ€™re a senior. Websterâ€™s dictionary defines retirement as â€œwithdrawal from oneâ€™s position or occupation, or from active working life.â€
The dictionary definition doesnâ€™t mention anything about needing to wait until age 65 or 70 to cease working. You can retire any time you want.
Hereâ€™s the catch.
In order to retire, whether itâ€™s at age 25 or 75, you need this thing called money. A lot of money. Your definition of â€œa lot of moneyâ€ may be different than someone elseâ€™s definition, but the end result is the same: you need to be able to pay for all your living expenses for the rest of your life without needing to earn anymore income.
You need to start planning. Now.
So whether youâ€™re planning on a 40-year career climbing the corporate ladder, contemplating starting a business or wanting to join the â€œFinancial Independence, Retire Early” (FIRE) movement, you need to start planning now.
As someone in their 20s or 30s, here are some suggestions for how to plan for your retirement.
Save your seat for our complimentary webinar, “Retirement Planning Essentials in Your 20s and 30s.” We’ll expand on topics discussed in this article on Thursday, June 24 @ 11am MT!
Retirement Planning in Your 20s
Tip 1: Increase income and decrease expenses. The first step towards saving enough money to retire is to lay the foundation for how youâ€™re going to earn money. Whether itâ€™s getting your first full-time job or starting a business, your 20s is when you want to start acquiring marketable skills that you can turn into money.
At the same time that youâ€™re starting to earn money, you also want to make sure to keep as much of the money you earn as possible. With your first job or successful business, it can feel like youâ€™ve got a lot money coming in! But you want to keep expenses as minimal as possible while avoiding credit cards and other forms of debt.
Tip 2: Pay yourself first. The best way to make sure your money doesnâ€™t disappear is by making saving a habit. As soon as any cash gets deposited into your bank account, transfer a fixed percentage of this money into a savings account before paying any other bills. Target 10% of your earnings for retirement accounts, such as an IRA, 401(k) or an SEP.
Paying yourself first can be a challenge for anyone at any age, but itâ€™s a habit you can learn. Look into different budgeting apps that can help track your spending, and be sure to put your savings or investment accounts as one of the expenses that need to be paid each month.
Tip 3. Become financially fit. If you have little in the way of savings or a bunch of debt, consider coming up with a plan to pay off all or most of your debt and start stashing away money into an emergency fund. Paying off debt as soon as possible will free up cash you can use for other things, including saving, investing or having a little bit of fun, as you enter your 30s.
Having an emergency fund may not seem like a big deal for you right now, especially if youâ€™re not married yet or donâ€™t have kids, but you never know when youâ€™ll need $1,000 to pay for an unexpected medical bill or to repair your car.
Retirement Planning in Your 30s
Tip 1: Finish becoming financially fit. Life may now start to get a little more complicated.
As you enter your 30s, try to finish paying off any remaining debt as soon as possible, and build an emergency fund that can let you pay all your expenses for 3 to 6 months.
If youâ€™re ambitious enough, aim for 12 months of living expenses in your emergency fund.
If you now have a family, be sure to keep tabs on how much you need to pay for monthly expenses, as this number can start growing pretty quickly. Donâ€™t underestimate how much you need in your emergency fund to pay all your bills and expenses now that your family â€“ and financial obligations â€“ are growing.
Tip 2: Continue increasing income. Thereâ€™s only so many expenses you can cut from your budget to save money and earmark for retirement, especially once youâ€™ve got a family. To keep your savings and investments growing, there will come a point when youâ€™ll need to focus more on increasing income rather than just decreasing expenses.
Some ideas to consider to keep your income increasing: Continually invest in yourself by learning new skills that can help you advance in your current job or make you an attractive candidate to other employers. If you own a business, consider expanding the products or services that you offer. If you are able, start building a passive income portfolio with assets such as rental properties.
Tip 3: Manage your risk. Now that youâ€™re in your 30s, you likely have several assets and possibly a family you need to protect. Make sure you have adequate insurance coverage for your family, house or apartment, vehicle and other assets.
Take the time to learn in-depth about the various types of common insurances, including vehicle, homeowners, health and life, and how much coverage is appropriate for your situation.
Your 20s and 30s are an exciting time of your life as you start earning serious money for the first time and start having a family. But donâ€™t neglect to plan for retirement. If you proactively manage your financial health, you may not need to wait until age 70 to officially retire!
We Welcome Your Questions
If you have any questions about planning for retirement and saving money in your 20s and 30s, please contact Paul Madrid, REDW Wealth Principal and Wealth Management Practice Leader.
Stay tuned to the Are You on Track for Retirement educational series from REDW Wealth as trusted advisors cover the investment essentials for your 40s and 50s, 60â€™s and beyond, and expand on discussed topics in our accompanying, complimentary webinar series. Register now!