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Retirement Planning in Your 20s, 30s, 40s, and 50s
By JLP | July 20, 2007
I picked up a copy of Business Week’s Annual Retirement Guide. I liked their suggestions of what people should be concentrating on at various stages in life (along with my commentary):
Tighten up on spending, ratchet up savings. This is probably the biggest obstacle to those in their 20s. Getting started in life is expensive. However, if you can put off buying anything that isn’t totally necessary, and manage to save some money, you will set yourself up nicely for later on down the road. As soon as you graduate from college, instead of buying that nice new car, buy a cheaper used car first. Instead of buying or renting that really nice apartment, buy or rent a cheaper apartment.
Put savings on autopilot. I LOVE this idea and have started utilizing it for my own finances. All of our monthly bills and money allotted for savings and investment are on automatic. Heck, out tithe is even on automatic!
Live beneath your means. This goes hand-in-hand with the first suggestion. If you can always manage to live below your means, you will build wealth.
Start an “escape fund.” This is a pretty cool suggestion. They recommend that this be after tax money invested for the sole purpose of helping you retire early. I still think it would be wise to stick this money in a Roth IRA since you can take out your contributions (after 5 years) with no taxes or penalties.
Revel in the Roth. Yep. The Roth IRA is an amazing tool especially for younger generations since they have time on their sides and the potential to build up sizeable assets which can then be used tax-free upon retirement (as long as you are at least 59 1/2 and have had the Roth at least 5 years).
Watch the fees. For the most part when it comes to investing, you get what you don’t pay for. Therefore, it makes sense to keep costs low. To do that, you need to look at the fees you are paying on your investment accounts.
Concentrate on your career. Pretty straight-forward advice.
If you’re going to have a family, there’s no time like the present. We did this in our 20s. We liked the idea of still being young by the time the last kid leaves the nest. We messed up that idea when we had our third child while in our mid-30s (I was nearly 35 and my wife was nearly 33). So much for being young when the kids leave the roost.
Set goals. This should also be a priority while you are in your 20s. Anyway, set some clear, concise, stretchable (but reachable) goals for yourself. Figure out how much those goals are going to cost and make a plan to bring them to fruition.
Stash your cash. Take advantage of your 401(k) and other tax-deferred or tax-free accounts. Also continue to fund your escape fund.
Insurance RX. You 30s is a great time to beef up your insurance. This is something I did earlier this year. It might even be time to look into an umbrella policy. They’re cheap and they give you a lot of protection.
Feed your escape fund. Over the years, the amount you are putting into your retirement accounts should be growing.
Monitor your investments. Again, this is something you should be doing all along. I monitor our investments quite often. However, you may want to do it once a year. Be sure you rebalance every one to two years.
Refine your retirement plan. Now is a great time to start thinking about withdrawal rates and how much income you can realistically count on during retirement. If it’s not enough, you need to save more.
Vacate your vacation home. Unless you plan on retiring to your vacation home now is a great time to sell it and use the proceeds to purchase your retirement home, which you can then rent out until you retire. We don’t own a vacation home and probably never will.
Get to work. If your goal is to retire early and start a business or second career, now is a great time to get started. The author of the article suggests setting up a home office.
Review your real estate. Are you gonna stay or are you gonna go? You need to figure out whether or not you are going to sell your house and relocate or if you are going to stay put. If you decide to sell, make sure you factor in the cost of improvements in order to help your house sell.
Stay with stocks. You are facing a retirement that could be 30 - 40 years in length. That makes you a long-term investor, which means you should be a stock investor.
Do a benefits check. Find out what retirement benefits your company has and figure out how much they are going to cost.
Cut the cord. Quit supporting your kids!
Devise a tax strategy. Hire a good tax advisor and learn the best ways to take money out of your retirement accounts. Do it the wrong way and it could cost you a lot of money and cause you a lot of headaches.
Topics: Retirement Planning |
July 20th, 2007 at 3:03 pm
I say have fun in your 20s. Make all the miskaes and learn from them. (This may cut down on mid life crises) Buckle down in your 30s, once you have a career and family no time for stupid mistakes.
I’m glad I had my fun in my 20s. By 28 I started taking personal finance differently. I started buying insurance and investing my money. Sometimes it’s OK to make mistakes other times it’s not.
So JLP, what happens in your 60s?
July 20th, 2007 at 3:13 pm
Moneymonk,
I quit where the Business Week article quit. However, hopefully by your sixties you’re retired and living the high life (notice I didn’t say living on High Life).
July 21st, 2007 at 10:24 am
I would also say have fun in your early 20s and have children (if you really want them) in your mid-20s and no later than your late 20s. You wouldn’t have as much energy or free time later on for fun later on. If you put off having children until you are in your 30s, you just might not be able to have them at all. I’ve never regretted having fun in my 20s and spending most of my money back then. I still regret not having children in my 20s.
There are important health reasons for women to have children before the age of 30 - both for the mother’s health and child’s health. Health is more important than money. Money can pay for fertility treatments, but they cannot guarantee success. Money can treat a child with Dawn, but wouldn’t it be better to have a healthy child? And why not reduce one’s risk of breast cancer later in life by having children earlier? Even if it is a small reduction in risk (in absolute terms), isn’t it worth it?
In terms of investment, I think the percentage of investments in the stock market should go down with age. I read somewhere that 100-age is the right formula for the percentage of your money you want to have in stocks. The reason is that if you look at historical stock performance you find periods of 20 years or so that had no growth. If such a period starts when you are 50, you want to be protected.
July 21st, 2007 at 11:40 am
Unfortunately, it doesn’t address people that want to retire early — they should have had a side bar at least that described how to change the path if you want to retire in your 40s or 50s.
July 21st, 2007 at 5:55 pm
This all looks good to me, though I would add getting long-term care insurance in your mid 50s. I was talking with a LTC broker last week for the software I’m developing and it turns out that the way they finance the coverage is by locking your payment amount when you enroll and then increasing it for new enrollees by 20-30% every 18-24 months. So the long-term expense of getting in late (if you want that insurance) is much higher if you plan on living to be in your 80s or 90s.
Also, Kitty, on stocks, I think that at retirement age, you’ll definitely want to be more than 35-40% in stocks, unless you have a substantial nest egg (the average amount working 55 year olds have saved for retirement is $60,000), because bonds and cash just can’t generate the kinds of returns that stocks can over time. Remember, it’s going to be much more common for folks to live into their 80s and 90s.
I recently came across this great list on ways to stay financially motivated:
1. Write a list.
2. Set (specific- time and place) financial goals.
3. Create concrete and personal reasons.
4. Create mini goals.
5. Keep a daily financial journal/blog
6. Don’t keep it a secret and involve the entire family.
7. Keep your goals visible.
8. Chart your progress.
9. Join financial communities.
10. Be patient.
11. Reward yourself
Anything you would add to this?
July 21st, 2007 at 7:57 pm
in your 20’s - save. 30’s - save. 40’s - save. 50’s - save. 60’s - enjoy.