- Why plan decade by decade?
- Start by deciding how much to save
- Your 20s
- Your 30s
- Your 40s
- Your 50s
- Your 60s
- Pros and cons
- The bottom line
Why plan decade by decade?
Start by deciding how much to save
The 4% rule
Percentage of your salary
- Contribute 15% of your salary to your employer’s retirement plan, though an employer match can be subtracted from your contribution. So if your employer contributes 3%, you can put in 12%.
- If you can’t hit 15%, start at whatever is comfortable and increase it by 1 to 2% each year.
- Invest up to 90% of your retirement funds in stocks, which can gain the most but can also fall dramatically. But given your young age and work and life expectancy, this is a good time to be invested heavily in stocks, ideally in mutual funds and not individual stocks.
- Reduce debt by paying off credit cards, and pay your bills on time and in full each month.
- Start an emergency fund to cover 3 to 6 months of expenses if you lose your job.
- Create a budget and follow it.
- Start other good financial habits that will stick with you for a lifetime so you can contribute more to retirement and retire early.
How much to save annually in your 20s
- Age 30: 1x current income
- Age 40: 3x current income
- Age 50: 6x current income
- Age 60: 8x current income
- Age 67: 10x current income
3 types of retirement plans
Individual Retirement Account
- Continue contributing 15% of your salary to your employer’s retirement plan.
- If you haven’t reached 15% yet, now is the time to get to it instead of waiting longer.
- Continue with 90% of your retirement funds in equities or stocks.
- Continue paying off debt, such as student loans, and keep funding an emergency fund.
- If you’re buying a house in your 30s, or even earlier, continue making retirement fund contributions.
How much to save annually in your 30s
- Continue saving 15% annually for retirement, increasing in 2% increments if you’re not there already.
- Keep at least 60% of your retirement funds in stocks, since your work and life expectancies are still significant.
- Buy life insurance if you don’t already have it to cover your family’s expenses and the loss of your income if you die.
- Look into adding long-term care insurance, which will be cheaper now than it will be later, as a way to prevent financial disaster during retirement.
How much to save annually in your 40s
- Keep contributing 15% to your retirement plans.
- At age 50 and older, you can add an extra $6,500 per year in “catch-up” contributions to your 401(k). For total contributions in 2020, that can be up to $26,000 into a 401(k).
- At age 59.5 you can withdraw money from a 401(k) without owing a 10% early withdrawal penalty. The penalty doesn’t apply, however, if you’re 55 or older in the year you leave your employer.
- If you have old retirement accounts from previous employers, make sure they meet your investment plan. You can also consolidate them.
- Eliminate debt, including student loans for your children, mortgage payments, and credit card debt.
How much to save annually in your 50s
- If you’re not on pace to hit $1 million or whatever you’ll need to retire for 30 years, start saving more than 15% of your income.
- Retirement plans allow catch-up contributions at this age.
- Look into a balanced approach of your assets, such as 50% equities and the other half in bonds or other safe investments.
- Research health care costs, Medicare payments, and what your life expectancy is.
How much to save annually in your 60s
Required Minimum Distributions
- IRAs: First RMD must be on April 1 of the year after the year you turn age 70.5.
- 401(k): First RMD on April 1 of the year after either the year you turn 70.5 or the year you retire.
Pros and cons
- The biggest pro to planning and funding your retirement decade by decade is that you’ll get to retire without worrying if you’ll have enough money.
- Contribute 15% of your annual gross income, or less if your employer puts money in, and compound interest will take care of the rest. If you hit the contribution limits on one type of retirement account, such as a 401(k), then open an IRA or Roth IRA if you have extra money to invest.
- Funding an IRA, 401(k), or other retirement accounts may leave your budget lacking, especially when you’re starting your career and your salary isn’t very high.
- Your friends may go on spending sprees that you can’t afford because you’re following the lead of the little pig that built a house with bricks. You're building your future house with direct deposits from your paycheck.
- Delaying funding can make compounding do less work for you, and require you to make catch-up contributions at a later age. Neither of those is fun and could put a crimp in your household budget in your 40s and beyond.
The bottom line
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