Planning for Retirement: Steps to Take in Your 20s and 30s

Retirement Planning

 Brian Watson By: Brian Watson
Planning for Retirement: Steps to Take in Your 20s and 30s
13:09

A quick note before we dive in: I'll be using the words "retirement" and "financial independence" throughout this article as they have become essentially interchangeable with each other. Younger generations tend to avoid the word "retirement", however. They prefer "financial independence" as their targeted goal, as most would like to continue working, perhaps just at lower capacity or at a job they enjoy more. The guidance below holds true no matter the goal that best aligns with you!

 

When you’re in your 20s and 30s, becoming financially independent, or no longer needing to earn an income to live your life at the level you currently do, can seem like a finish line you’ll never cross.

 

Add in the pressure of covering your daily living expenses, paying off student loan debt and starting a family, and the planning to accomplish this can be easy to postpone.

 

However, making smart, strategic choices early in your career can help ensure you have the resources you need to live comfortably after you leave the daily grind behind. If you don’t take the time to plan now, you might find yourself playing catch-up.

 

The good news is: if you’re reading this article, you’re already on the right path!

 

Taking the following steps at the onset of your career can help set you up for future success and minimize the risk of not having enough saved when you reach your later working years.

 

Steps to Take in Your 20s for a Comfortable Retirement

Build Your Emergency Fund

It may seem basic but building an emergency fund is the first step to becoming financially secure. Without it, your other financial goals will get derailed if an emergency occurs that you can’t cash flow. Then any planning work you’ve done to reach your goals needs to be totally revamped to compensate.

 

Not having a financial cushion when the unexpected strikes can result in credit card debt or high-interest loans—both of which are a surefire way to hinder your ability to build wealth. Before saving for anything else, it’s essential to have a fully funded emergency fund.

 

Most experts recommend saving three to six months of living expenses, but you may need more depending on your individual situation.

 

It can be tempting to call a portion of your investments your emergency fund. But that exposes you to market risk and liquidity issues if you need to access it, so we would warn against this.

 

A high-yield savings account is the optimal place to keep your emergency savings because it’s liquid, stable, and easily accessible.

 

Maximize Your Employer Contributions and Benefits

Once you have a fully funded emergency fund, focus on getting the most out of your employer-sponsored retirement plan and benefits your employer offers.

Contribute to the Employer Sponsored Retirement Plan

Investing in a 401(k), 403(b), or other employer sponsored savings plan is one of the simplest ways to maximize your retirement savings, and automating your contributions can help you stay on track.

If you’re not already doing so, ratchet up your contributions to get the full company match. If you can afford to save more, increase your annual contribution until you max out your employer-sponsored accounts.

Don’t forget to choose an asset allocation that supports the long-term growth of your portfolio.

Contribute to a Health Savings Account (HSA)

 

If you opt for your employer’s high-deductible health plan, you’re eligible to put money in a health savings account up to the annual contribution limits.

 

An HSA is a triple-tax-advantaged account that allows you to receive a tax deduction on your contributions, tax-deferred growth on investments and tax-free distributions when you use the funds for eligible medical expenses.

 

One of the benefits of an HSA is there’s no time limit for using the money.

 

If you’re healthy and don’t incur significant medical expenses when you’re young, investing the funds and allowing them to compound can create a sizeable account you can use to pay for healthcare later in life when your expenses are likely to be higher.

Fringe Benefits

 

Fringe benefits help you access valuable services at low or no cost, yet they are some of the most underutilized perks employers offer.

 

You may have access to a financial planner, estate planning documents, gym memberships and more—at a hefty discount.

 

When you take advantage of these offerings, you can put the money you save on services toward other financial goals.

 

Evaluate Your Goals and Build a Budget

Once you have an emergency fund and are setting aside enough for retirement, you can focus on other goals.

 

You may not be able to save for everything at once, but prioritizing your goals helps you decide what to save for now and acts as a roadmap for the future.

Creating a reverse budget will show you how much you can allot to each goal. Start by calculating your living expenses plus what you need for retirement savings.

Then, allocate what’s left over to other goals, like saving for a house, traveling, or planning a wedding. A financial advisor can give guidance and run projections to help determine the likelihood of achieving each goal on your list.

 

Basic Legal Documents

Planning for a health crisis, disability, or death may not seem like a priority in your 20s, but you never know what the future holds. It’s important to have a few basic estate planning documents in place to ensure your wishes are followed if something happens to you.

  • Power of attorney (POA). A POA allows someone else to act on your behalf if you’re unable to. The two most common types of POAs—financial and healthcare—enable the person you designate to make financial and healthcare decisions for you if you can’t

  • Beneficiary designations. Designate a beneficiary for every account you have, including bank accounts, retirement accounts, life insurance policies, and other assets. This will keep your estate out of probate after your death.

  • Even if you don’t have children, you should have a will. A will can be a backup if you forget to designate a beneficiary on any of your accounts so the state doesn’t decide how your assets should be distributed. If you have children, it also designates guardianship if both parents die before the children reach adulthood.

Take Ownership of Your Property and Casualty Insurance

If you’ve been on your parent’s auto insurance policy since you got your license, you may have no idea what it covers or how much it costs. Now’s the time to get up to speed. You need to understand what your policy will and won’t pay for if you’re in an accident.

 

It’s also important to know what your renter’s or homeowner’s insurance will cover and how much it will pay if you need to file a claim.

 

Evaluating the coverage each type of insurance offers against your assets and potential liabilities is essential. This will allow you to determine whether you have enough coverage or should increase your liability limits to protect your growing assets.

 

Evaluate Life and Disability Insurance

Life and disability insurance are most important early in your life when your ability to earn income is your most valuable asset.

 

If you’re unmarried and have no dependents, you can probably skip life insurance at this stage. But if you’re married or have dependent children, it’s important to have enough coverage to protect them after your death.

 

Even if you don’t have dependents, disability insurance is worth considering. Would you be able to pay the bills without it if you could no longer work? If not, you need coverage to replace as much of your income as possible.

 

Steps to Take in Your 30s for a Comfortable Retirement

 

At this stage of your life, you may have more cash flow, allowing you to save for more of your goals. But your expenses are probably also increasing.

 

To ensure you have enough assets saved for retirement, take these steps now.

 

Pay Off Lingering Debt

Nothing gets in the way of achieving your financial goals like having high-interest debt hanging over your head. If you’re unsure whether to use extra cash to pay down debt or invest it, here’s a general rule of thumb.

 

Pay off any non-mortgage debt with an interest rate of 5% or higher. Keep making your regularly scheduled payments on debt with an interest rate below 5%.

 

Because your average rate of return on investments is fairly likely to be higher than 5% over the long term, you’ll likely come out ahead by investing extra money rather than using it to pay off low-interest debt.

 

Max Out Savings Buckets

For most people, maxing out their 401(k) first makes the most sense, especially if you’re a high earner. It reduces your current year’s taxable income and allows you to save substantial sums for retirement.

 

After maxing out your 401(k), opening a taxable investment account is a good next step (although we'd recommend getting rid of any outstanding mortgage debt before investing in taxable accounts.). Having a mix of account types provides flexibility for making withdrawals during retirement.

 

If you’ve reached a point where you’re no longer eligible to contribute to a traditional IRA or Roth IRA, a backdoor Roth conversion might make sense.

 

Because your 30s can be a decade when your compensation and overall financial situation become more complex, it can be a good time to start working with a financial advisor.

 

They can examine your unique financial situation to help you determine the best way to allocate your resources to help you achieve your most important financial goals.

Avoid Investment Gimmicks

Early on in your retirement savings journey, it can be tempting to look for shortcuts to “get ahead.” But more often than not these “shortcuts” are anything but.

Overly risky investments and active day trading may make you feel like you’re getting ahead when in reality, they’re likely to lead to a financial setback.

The best way to “get ahead” with your investment savings is to stick with tried-and-true methods, including consistently contributing to tax-advantaged accounts, maxing out your contributions, getting your company’s full employer match and paying off high-interest debt.

These strategies are far more effective for building long-term wealth than any get-rich-quick scheme you might see on a late-night infomercial or YouTube video.

Plan for Parenthood

Being a parent isn’t the right choice for everyone. But if you decide to start a family, it’s important to consider the costs involved.

 

Not having expenses like healthcare, clothes, diapers and childcare mapped out before your bundle of joy arrives can create unnecessary stress.

 

If you plan to contribute financially to your child’s education, setting up a 529 early in their life with aggressive allocations can pay off when it’s time to pay for tuition.

 

And if having a child will affect your ability to save for other goals, it’s important to adjust your financial plan accordingly.

 

Reevaluate Estate Documents and Life Insurance

If you created estate documents in your 20s, now is a good time to review them—especially if you have a spouse or children who weren’t part of your life when you initially set them up.

 

You may want to change your power of attorney, update beneficiary designations or adjust your will. As you get older, you typically have more assets, so setting up a trust might make sense.

 

If you skipped life insurance during your 20s, you may need to purchase some. Be sure to buy enough coverage so your spouse and dependent children can pay the bills and maintain their current lifestyle if something happens to you.

 

Next Steps

 

Making the right decisions in your 20s and 30s will improve your chances of having a sizeable nest egg as you approach retirement age.

 

As your income and assets grow, a wealth manager can help you create a comprehensive wealth management plan to ensure you’re on track for retirement and your other financial goals.

 

At Plancorp, our wealth managers consistently revisit your financial plan to ensure it continues to align with your risk tolerance and financial goals, and make adjustments when it doesn’t.

 

To determine if your financial plan needs improvement, check out our two-minute financial analysis and get personalized feedback based on your answers.

 

Want more detailed advice on how to invest based on your age? Download our articles about investing in your 20s or investing in your 30s.

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Brian joined Plancorp in 2020 as a financial planner. Prior to Plancorp, he worked at Edward Jones and had his own office in Litchfield, Illinois. His experience taught him how to build relationships and truly get to know clients as people first. He believes that is how you can truly impact clients' lives. Brian came to Plancorp because of the more collaborative and team-driven environment. He enjoys turning advanced financial concepts into easy to understand strategies for his clients. He especially enjoys helping clients navigate equity compensation! More »

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