A down payment on your first home? A beach house where you can spend your golden years with your grandkids? Whatever your financial goals may be, it takes careful planning at every age to build the wealth needed to achieve them. Here’s a look at some steps you can take at each stage of your life to help set you on the right track.
Before we take a look at a generational breakdown of how to build wealth, it’s important to consider setting shorter-term and long-term goals.
Short-term goals might include things like buying a new car or a down payment on a house, while longer-term goals might include sending a kid to college or having enough to retire. Setting realistic goals helps you determine how to invest and how much wealth you might need to achieve them.
Building Wealth in Your 20s
When you’re in your 20s, you are just out of school and likely making your first career moves. Even so, it may feel like long-term financial goals are a problem for your future self to work out.
After all, you’re young and it’s time to let loose, right? Well, yes and no. While you should certainly enjoy yourself, your very youth gives you a huge advantage in the form of time.
It is common knowledge that retirement savings and investments you make early on have more time to grow and to possibly take advantage of compound interest, which is the interest you earn on your returns, among other advantages. So this could also be a good time to start saving for your long-term goals. Here are some steps that may help you get your wealth-building off on the right foot:
Making a Budget
This might feel like a drag, but it’s worth it. One good idea is to know how much you’re making and spending in order to have control over it.
To get started, try tallying your necessary expenses—housing, utilities, insurance, transportation—and subtract from your income. Some recommend dedicating a portion of the difference to savings. The leftovers can be used for things like discretionary spending.
Having an emergency fund
The general recommendation around the idea of an emergency fund is to build up savings of approximately three to six months worth of living expenses.
That way, if an unexpected event keeps you from working, you’re more likely to be covered until you get back on your feet. An emergency fund could help protect you from going into debt or dipping into your other dedicated savings.
Keeping your debt in check
Pay off any debts, such as student loans, or other high-interest debt as fast as you can. Interest payments on these debts can add up and a drag on your ability to save. That is why it’s generally recommended to be thoughtful with credit card spending.
Credit cards can be a useful tool for building credit and can even be a positive for perks, such as points or rewards, especially if you are able to pay the balance off each month and not getting hit with interest charges.
Contributing to a 401(k) is one good place to start, if offered by your employer. These offer tax advantages that can help you supercharge your retirement savings.
If your employer offers a match, try to contribute at least that amount (usually 3% to 6%.) If your employer doesn’t offer retirement accounts, you can consider opening an IRA to get access to tax-advantaged savings. You may also consider investing on your own in a brokerage account for other long-term goals that aren’t retirement.
Investing in mostly stocks
When you’re young, you can typically stand to take on a little bit of risk in your portfolio, particularly when you look at long-term financial goals, like retirement. This could mean your investment portfolio may be composed largely of stocks as opposed to bonds and other fixed-income investments.
Stocks may offer a higher return than say bonds for instance, but they can also be more volatile. The idea is that since you have a longer time left before retirement, you’re likely in a better position to ride out any possible downswings the stock market may experience.
Building Wealth in Your 30s
Once you’re in your 30s, you’ve likely got a few milestones under your belt. Perhaps you own a home or have kids. Your expenses may be higher than when you were in your 20s. In your 30s, you likely still have a few decades before retirement, so you can continue to invest in riskier assets that may offer higher returns, like stocks.
Starting saving for your children’s education
If you’ve got kids, you may also be considering ways to save for their education. One way to do this is through a 529 account. This is another tax-advantaged savings plan, courtesy of the government, that helps you save faster for your child’s college education. As with other investments, the earlier you start, the more likely you can benefit from compounding growth.
That said, if choosing between funding a 529 savings account and saving for retirement, depending on individual circumstances, some may choose retirement all the way. Your children can borrow to pay for college, but the avenues of borrowing money to help with retirement are limited to avenues such as a reverse mortgage.
Boosting your retirement savings
The slow march of time is bringing you closer to retirement age. Some advise that by age 35 it’s recommended to have twice your annual salary saved up for retirement. Think about increasing the amount you’re saving each month— even a 1% increase per year could help.
Building Wealth in Your 40s
At this point, you’re hopefully well underway to building your nest egg. You may own large assets like a home and have a family. You may now also find yourself at the peak of your earning years.
In your 40s, the drumbeat mantra of “increase your retirement savings” still applies here, hopefully made easier to achieve by a higher paycheck. There are some other steps you may want to consider as well.
Protecting your wealth
It could be a good idea to make sure you have adequate insurance to cover your property and your person, including health insurance, home insurance and life insurance. Especially if you have a spouse or family, life insurance could help protect your investments and ensure that your savings are used for their intended purpose should something happen to you.
Should your stock allocation decrease
In your 40s, and depending upon market conditions, you may still want to invest most of your portfolio in stocks. However, as you near retirement age, you may want to consider shifting a greater portion of your assets toward bonds and other fixed-income assets.
In your 40s, you may be nearing the time when you’ll need that money, and shifting it to less volatile investment options could help protect it from downward trends in the market.
Assessing all your accounts
Regularly going through all of your accounts—including retirement, investment and bank accounts—with a fine-toothed comb is recommended. This may help you identify which investments have things like high fees that may take a bite out of your savings growth.
Consider replacing them with low-fee investments like index funds. If you have retirement accounts from multiple employers, consider rolling them over into one account to help you keep track of their performance better.
Dipping into your retirement accounts
It may be tempting at times, but it’s generally recommended to avoid withdrawing money from your retirement accounts before you reach age 59 and a half. Doing so can trigger a 10% penalty in addition to a possible income tax assessment for the money withdrawal.
Beyond Your 40s
Once you hit 50, if you are like most people, you may only have 15 or so more years before you hit retirement age.
As you enter the years just before you retire, you’ll likely want to continue getting more conservative in how you structure your investments.
In your early 50s, you’ll likely still be saving as much as you can, but the older you get, the more you may look toward working to conserve your wealth.
Making catch-up contributions
The IRA contribution limit is $6,000 for 2020, and if you’re 50 or older, you can contribute an extra $1,000 a year. That’s a total contribution of $7,000 per year. These catch-up contributions could help give you an extra push as you near retirement if you’ve fallen behind on your savings or you simply want to rev up your savings during your last decade or so of work.
Wait to take Social Security
You can start to take Social Security benefits as early as age 62. However, if you start them that early, your benefit will be 25% less than if you waited until full retirement age. SSA considers the full retirement age to be 66 for those born between 1943 and 1954. The amount of your monthly benefit currently increases until you hit age 70, at which point you should receive 132% of your benefit each month.
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