Retirement Planning by Decade: What to Do in Your 20s, 30s, 40s, and Beyond
By Brendan Halleron, CFP®, AIF®, BFA™
What’s included:
• When Should I Start Retirement Planning?
• In Your 20s: Start Early and Let Time Work for You
• In Your 30s: Increase Contributions and Establish a Plan
• In Your 40s: Catch Up and Evaluate
• In Your 50s: Maximize Savings and Minimize Debt
• In Your 60s: Prepare for the Transition
• In Your 70s and Beyond: Manage Distributions and Keep Your Plan Working
• Bonus Tip: Stay Flexible
• Key Takeaways
It can be hard at times to figure out what you are going to eat for dinner, much less when, where, and how you are going to retire! Since very few people dream of working forever, retirement planning is important for everyone, not just those who are nearing the twilight of the career. While the idea of planning for a time that is decades away may seem far off, starting to plan for retirement as soon as possible helps ensure you can retire in the manner you desire. The decisions and actions you take now will help you reap the rewards of patience, discipline, and thoughtful planning well into the future.
When Should I Start Retirement Planning?
Today! No matter your age, life stage, career, or goals, taking even the smallest planning steps today can have a huge impact. Think of a snowball rolling down a hill: getting the snowball started may seem inconsequential. But as the ball picks up more snow and momentum, its size and speed grow exponentially. The higher up the hill you start rolling the snowball, the more time it has to grow in size and speed. So, while it’s never too late to start, the earlier the better.
In Your 20s: Start Early and Let Time Work for You
Did you know that Warren Buffet, one of the world’s richest individuals, accumulated over 99% of his net worth after the age of 65? How did he do this? Through the power of compounding growth. Warren understood this valuable principal: if your investment earnings continue to be reinvested over time, it can eventually lead to significant exponential growth. While we may not all accumulate as much as he has, starting with small contributions in your 20s and allowing your money to grow over 40 years can significantly increase your flexibility later in life.
Consider this example: a recent 24-year college graduate starts contributing $500/month to their 401(k), with an average rate of return of 7%. By age 65, this amount will have grown to over $1,500,000. If this same individual waits until age 40 to start contributing $500/month, they will have only accumulated $380,000 by age 65. That’s a massive difference! In your 20s, you should focus on spending less than you make, paying off high-interest debt, ensuring you have a proper emergency reserve, and building good investment habits (like opening a Roth IRA so your assets can grow tax-free). Investing early on will pay off in the end.
In Your 30s: Increase Contributions and Establish a Plan
Now that you have moved up in your career and are hopefully earning more than in your 20s, it’s time to get more focused on specific goals. First up: if you are not already, make sure you are at least contributing the full amount to your employer sponsored retirement plan, such as a 401(k), to receive any employer match. From there, each time you receive a raise, increase your contribution to your retirement account 1%. I promise you will not miss this in your daily spending.
Lastly, consider your other financial goals, such as buying a newer car, buying a home, or paying for college. At some point you may want to redirect your 1% investment increases to a taxable brokerage account. Just because you have the funds to save the maximum amount in your retirement account does not mean you should. A taxable brokerage account is a great way to continue to save, but allow flexibility for using some money for shorter-term goals.
In Your 40s: Catch Up and Evaluate
Now is the time to be full speed ahead in your savings! Make sure you don’t allow lifestyle creep to interfere with your objectives, and continue to save more each year. With children out of daycare during this decade, you have likely exited the first major spending hurdle of their lives (with college coming faster than you think). Take this time to further diversify your investments and start to think more seriously about your financial goals and when you want to attain them.
In Your 50s: Maximize Savings and Minimize Debt
If retirement planning were a game, your 50s are the second half. All of the preparation and hard work up to this point will start to pay off, but it does not mean you can get complacent. Make sure to take advantage of IRS catch-up contributions to your various accounts (e.g. 401(k)s, IRAs/Roth IRAs, and HSAs) and continue to pay down any high-interest debt, if any. You should also revisit your portfolio and ensure the level of risk is appropriate to your evolving situation – you do not want to undo decades of hard work and planning. While paying off your home before retirement is a nice goal, it’s not a necessity. However, be careful of how many obligations you have as you approach retirement. The more items that own you, versus you owning them, can create additional stress and potentially delay when you retire.
In Your 60s: Prepare for the Transition
You’ve almost made it. The lake, the golf course, the crafts - every day is almost a Saturday! You need to start considering your income plan in retirement, for when the checks you are sending to your retirement accounts will start coming back to you. Review your social security benefits to plan for how much you will receive at full retirement age (be mindful of federal taxes and Medicare). Additionally, it may be worth talking with a licensed broker on your various healthcare options and what you might need once you are no longer part of your workplace health plan. Believe it or not, taxes and healthcare will become your largest expenses in retirement, not travel or leisure.
Finally, practice documenting and budgeting for how you will live your life when you retire. This way, you can prevent any spending surprises and ensure your transition to retirement is smooth and thoughtfully planned out.
In Your 70s and Beyond: Manage Distributions and Keep Your Plan Working for You
Congratulations! You have made it to the point where every day is a Saturday. However, just because you’ve made it to this point does not mean your plan is done. Instead, you are entering a new phase, where your investments send you a check each month, rather than the other way around. Now is the time to ensure you have an appropriate, tax-efficient distribution strategy in place, your portfolio is risk-appropriate to handle whatever happens in the stock or bond market, and you are set-up to satisfy your required minimum distributions. Age may start to slow you down (health is wealth), but your planning needs to adjust and continue on.
Bonus Tip for Every Age – Stay Flexible
If there is one thing I’ve learned in my career as a financial planner, it’s the certainty of uncertainty: you should always be ready for and expecting the unexpected. Life happens and circumstances change, and you will need to adjust your plan over time.
Navigating these events can have dramatic consequences and working with a financial planner can help you evaluate the advantages and disadvantages of your decisions. While every situation is a little different, we have seen how others have handled similar circumstances, and can provide insight based on these experiences to help you make the best decision for you.
Key Takeaways
No matter where you are in your retirement planning journey, there are steps you can take to increase your outcomes.
• In your 20s: Start saving (even if it’s small)
• In your 30s: Increase and diversify where you are saving
• In your 40s: Work toward maximizing your savings
• In your 50s: Minimize debt and risk, and take advantage of catch-up contributions
• In your 60s: Create a plan for your retirement income and start homing in on how much you need
• In your 70s and beyond: Review your plan, taxes, and portfolio to ensure they remain aligned for the long haul
Notice a theme above? Save early and often. This will put you in a position to be able to optimize over time. There is generally no ‘silver bullet’ to reaching your financial goals: it takes consistent discipline over a long period.
No matter where you are on your journey, it’s never too early nor too late to improve your retirement plan. If you have any questions about your plan or want to better understand where you are today, contact us to see how we help our clients work toward achieving their financial goals.
Information presented is believed to be factual and up to date, but we do not guarantee its accuracy. It is general in nature and should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author on the date of publication and are subject to change. Moreover, no client or prospective client should assume that this content serves as the receipt of, or a substitute for, personalized advice from Affiance Financial, or from any other professional.
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