How To Plan For Retirement
How to Plan for Retirement in Your 30s
It might seem like a complex topic, but there are lots of simple ways you can lay the foundation of a worry-free retirement. If you’re in your 30s or about to turn 30, it’s time to think about your retirement plans. Figure out how much money you’ll need to maintain your standards of living, set a savings goal, and determine how much you can afford to contribute to retirement funds per paycheck. While retirement savings are important, don’t let retirement overshadow your other financial goals, such as establishing an emergency fund, buying a home, or funding your children’s education.
Developing a Retirement Plan
Discuss retirement with your partner, if you have one.Work with your partner to set retirement age goals, estimate retirement expense and income, and set savings goals. Factor in their retirement accounts, if they have individual savings, and Social Security earnings. Talk about how you each foresee living in retirement and about your expectations for your living standards.
- For example, discuss whether you intend to save money in retirement by moving into a smaller home or condo in a location with a lower cost of living. On the other hand, you or your partner might want to stay in your home as long as possible. Perhaps you both want to save enough to travel frequently during retirement. Each of these considerations will impact your retirement savings goals.
Estimate your retirement expenses.To estimate how much you’d spend in retirement, total your current annual expenses. From that total, deduct savings (you won’t be saving for retirement after you retire), payroll taxes, and other expenses you won’t have in retirement. For instance, deduct your mortgage if you’ll own your home outright or deduct your childcare costs if your children will be adults when you retire.
- As a rule of thumb, the average person needs around 75 percent of their pre-retirement income to maintain their standard of living after they retire. If you make ,000 per year pre-retirement, your annual retirement income (including withdrawals from savings accounts) should be around ,000.
Calculate the retirement savings you’ll need.Once you’ve estimated your annual expenses during retirement, add up the earnings you expect from Social Security, a pension, rental properties, and other regular income. Then subtract your expected income from your estimated expenses. The difference will help you determine the amount you’ll need to save in individual retirement accounts.
- If your monthly expenses during retirement will be ,000 and you’ll get ,000 per month from Social Security and your pension, your income gap is ,000 per month, or ,000 per year.
- Multiply your annual income gap by 25 to find how much you need to save for a 25-year retirement. If your annual income gap is ,000, you’ll need a total of 0,000 in savings.
- You can also use this tool to help determine how much you’ll need to save: .
Compare your debt’s interest cost with your savings’ earnings.To decide how much to contribute to savings, you need to figure out whether you should spend more to pay off debt than on retirement. Examine your current debt repayment plans and add up the total interest you’d pay. Compare that amount with the earnings you’d accrue if you invested that money in a retirement savings account.
- Suppose you have credit card debt at 18 percent interest. It makes more financial sense to prioritize paying off that debt instead of investing money in an IRA that earns you 8 percent annually. Your debt’s interest costs more than your savings’ earned interest, and repaying that debt faster will reduce your interest in the long-term.
- However, if you’re repaying student loans at 5 percent interest, it makes sense to maximize your contributions to an employer-sponsored 401(k) instead of prioritizing paying off the loan. On top of annual earnings, your employer matches contributions to your 401(k). Paying off low-interest debt at the expense of free money toward retirement savings isn’t worth it in the long run.
Factor in the expenses you’ll have in your 30s and 40s.If you’re in your 20s or are on the cusp of turning 30, don’t assume that it’s easy to save for retirement as you get older. If you’re in your 30s and are determining your contributions to retirement accounts, factor in that your expenses will likely increase significantly in the near future. Saving for retirement is important, but you need to think about setting aside money for buying a home, raising children (and paying for their education), and other expensive life choices.
- If you don’t plan on having kids or buying a home, you can contribute more to retirement savings. When it comes to home ownership, remember that owning a home outright during retirement can translate to lower expenses. You won’t have to pay a monthly mortgage or rent.
Get a second opinion on your retirement plan.You’ll have the bones of a retirement plan in place once you’ve determined a savings goal and estimated how much you can afford to contribute to savings accounts. From there, ask a savvy friend or family member to review your income and expense estimates, savings goals, and planned contributions to retirement funds. It’s also wise to consult a certified financial planner.
- Ask your second opinion, “Do you think these income and expense estimate are accurate? Do you think I should prioritize outstanding debt over making contributions to an IRA? Do you have any advice about setting the amount I contribute to savings?”
Investing in Retirement Accounts
Maximize your 401(k) contributions, if you have one.The most important retirement fund for 30-somethings is an employer-sponsored 401(k). Invest in your 401(k) up to the amount matched by your company. For example, if your company matches up to 5 percent, contribute 5 percent of your annual gross income to your 401(k).
- At least 10 to 15 percent of your income should go to retirement savings. Beyond your 401(k), invest in supplemental accounts, such as a Roth IRA. These supplemental options are also at your disposal if you’re an entrepreneur or if your employer doesn’t offer a retirement plan.
- As of 2019, the maximum annual contribution to a 401(k) in the United States is ,500.
Open a Roth IRA.Set up a Roth IRA (individual retirement account) with your bank or find a broker online. Look for funds with annual fees around 0.5 percent. Base your contribution on your 401(k); between your 401(k) and IRA, you should contribute at least 10 to 15 percent of your income to retirement savings.
- For most 30-somethings, a Roth IRA is a better investment than a traditional IRA. Unlike traditional IRAs, contributions to a Roth IRA are taxed based on your current tax bracket. Paying taxes on contributions to a Roth IRA now will likely save money by reducing your tax liability in the long run.
- The maximum annual contribution to a Roth IRA ,500. Your annual income must be less than 0,000 in order to make the maximum contribution. If you make less than 5,000 but more than 0,000, you can make a reduced contribution.
Invest 70 to 80 percent of your retirement savings in stocks.With retirement 30 to 40 years away, you can tolerate stock market volatility if you’re in your 30s. When you set up your 401(k) and Roth IRA, have your bank or broker invest the majority of your contributions. The market will boom and bust repeatedly over the coming decades, but aggressive investment now could boost your earnings by several percentage points.
- Your retirement accounts are held by a financial institution, such as a bank or brokerage firm. The simplest way to invest your retirement savings is to contact your financial institution and ask them about your investment options.
- While you could hire an investment manager to personally oversee your portfolio, it's probably not worth the expense. Actively managed investments that hand-pick securities can offer a greater return, but you don’t need major short-term earnings for your retirement savings. Even a 2 percent annual boost in earnings can add hundreds of thousands of dollars to your retirement funds.
Choose mutual funds and ETFs if you're managing your own investments.Some financial institutions allow 401(k) and IRA account holders to choose their own investments. If you have this option, invest in mutual funds and ETFs (exchange-traded funds), which are accounts that hold investments in dozens or hundreds of individual securities. This means they're diversified, so you won't take a hit if 1 of the companies you invest in performs poorly.
- If you're able to directly manage your investments, you'll be able to select options through your online account with the financial institution that holds your 401(k) or IRA. You'll see a list of available funds that you can invest in and, usually, risk ratings. If your plan provider doesn't offer ratings for specific funds, look them up on Morningstar ().
- Mutual funds and ETFs charge management fees, which are represented as expense ratios. ETFs usually have the lowest expense ratios. Choose ETFs with expense ratios between 0.1 and 0.5 percent, and more actively managed mutual funds that charge between 1.3 and 1.5 percent.
Spread your investments across stock fund categories.Stock funds, or mutual funds and ETFs, are divided into several categories: US large cap (large companies), US small cap (smaller companies), international, emerging markets, natural resources, and real estate. Your 401(k) or IRA will most likely offer at least 1 fund per category. If you're managing your own investments, invest in multiple categories and put more money into bigger categories, like US large caps and international.
- For example, put 50 percent of your investments into a US large cap fund, 30 percent into an international fund, 10 percent into a US small cap fund, and spread the remainder among emerging markets and natural resources.
Roll over your old 401(k) when you switch jobs.Cashing out a 401(k) when switching jobs is a major mistake. Instead, roll it over to your new 401(k) or an IRA. Cashing out a 401(k) in your 30s carries major tax liability. If you’ve saved 0,000, you might end up unnecessarily paying ,000 in taxes and penalties.
Meet your company’s vesting milestones before switching jobs.Vesting refers to how long you have to work for a company before you can keep 100 percent of your employer’s contributions to your 401(k). If you have to work with a company 5 years before you can keep all of their matched contributions, it’s in your best financial interest to stick with it, even if you get an offer for a job with a better salary.
- If you do get a better salary offer, you can always use that to negotiate a raise with your current employer.
Sign up for the Acorns app.Acorns links with your bank account and credit cards, and automatically invests spare change into a portfolio of ETFs. It's an easy way to invest and can supplement your retirement savings.
- For instance, if you make a .50 purchase, Acorns will round it up to and designate the $.50 difference for investment. The app makes an investment each time you've accrued in spare change.
- Download and sign up here: . Acorns costs per year if your portfolio is worth less than ,000, and 0.275 percent if it's worth more than ,000.
Balancing Your Financial Obligations
Set a budget.Start by listing your total monthly income after taxes. Then total your mortgage or rent, car payment, utilities, and other necessities. Next, add up groceries, gas, and entertainment expenses.
- Subtract your total expenses from your income. You should have about 20 percent of your income left to save. If you don't, you'll need to find ways to lower your expenses, such as going out to eat less or downgrading your cable package.
- A budgeting app, such as Mint, can help you figure out your expenses and set a budget.
Create an emergency fund with 6 months of your net income.Retirement savings shouldn’t be your only financial goal. Additionally, you should start putting money into an emergency savings account, which will cover your expenses in the event that you lose your job, get sick, or encounter another hardship. Aim to save at least 6 months of your net income in your emergency fund.
- If you make ,000 per month after taxes, aim to save ,000 in an emergency fund.
Save for a down payment if you want to purchase a home.If your goal is to own a home, don’t invest so much in retirement savings that you can’t afford to save for a down payment. Contribute as much as you can to your employer-sponsored 401(k) up to the match limit. Then prioritize down payment savings over making contributions to other retirement funds.
Don’t overspend on cars.Automobiles lose value as soon as you drive them off of the lot. Instead of buying fancy cars and unnecessarily upgrading your ride every 2 or 3 years, buy a sensible car and try to keep it for around 10 years. You’ll end up saving thousands of dollars, giving you more flexibility to pay off debt and contribute to retirement or down payment savings.
Save for college if you plan on having children.If you have kids or plan on having children, open a state-sponsored 529 plan for college investment. A 529 plan allows earnings to grow, and money spent on education can be withdrawn tax-free.
- Suppose you invest 0 a month in a 529 plan from your child’s birth to their 18th birthday. At a 6 percent return, you’ll have saved ,000 for their college education.
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