Saving Strategies for Every Decade of Life
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Many people have financial goals, but they don’t always think of them in stages. While that’s generally okay for your day-to-day personal finances, when it comes to saving for longer-term goals, it’s critical to have a plan. Especially with life expectancy increasing, it’s important to have a savings plan that appropriately prepares you for retirement age and other major life goals you may have as you grow older.
Whether you choose to use a financial advisor or are coming up with a financial plan on your own, thinking about your life in stages is a great way to ensure that nothing falls through the cracks. For example, your financial goals and savings strategies during your peak earning years (roughly 35-55 for women and 45-65 for men) will differ from when you start.
So, when do you need to consider estate planning or health savings accounts? Starting in your 20s and moving up to and beyond your 60s, here are savings strategies for every decade of life.
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Saving in your 20s
As you enter the workforce after graduating high school and college, it’s important to make smart financial moves no matter how much money you make at your first job. While some of this advice could also be useful in your late teens, the following two concepts are the most crucial as you’re just starting out on your own in your 20s.
Set up a strong financial foundation
Starting with smart financial habits early is much easier than breaking bad habits later. As such, the sooner you can set up a strong financial foundation, the better. Setting up a budget — and sticking to it — is a great way to ensure you stay on top of your finances. Without a plan you can follow, you aren’t in control of your finances, which means you can’t strategize how best to use your money to get the life you want.
One way to set up a strong financial foundation is to establish an emergency fund. This should be one of your first savings goals, as it enables you to avoid taking on unnecessary debt in order to make ends meet in the face of an unexpected expense. As you save for your emergency fund, it’s also a good idea to save for more common expenses that may crop up yearly. While you don’t know that you’ll need to buy new brakes or tires for your car, you can expect this expense at some point in your life. As such, it’s not really an emergency, and prioritizing a budget category for this could help keep you from dipping into your emergency fund later down the road.
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Start saving for retirement early
With a budget (and the knowledge that comes from knowing what your income and expenditures are each month), you can have some money set aside to save for retirement. Retirement planning doesn’t need to be complicated, either. If you have a 401k match at your job, ensuring you meet the allocation to get that match in full is a great first step. If you want to save some additional money for retirement, setting up an IRA or Roth IRA is a good way to increase your retirement savings.
Why is it important to start saving for retirement early? In two words: compound interest. Compound interest is the interest you earn on interest. It’s so powerful because of time — the longer your money is in an account, the more interest it earns.
Getting started in your twenties versus your thirties can make a big difference. If you invest $5,000 a year starting when you are 21 and retire at 65, you’ll have earned $99,217 by that time, assuming an annual interest rate of 7%. Conversely, if you started that investment at 31, you would only have $59,860 by the time you retire. This is why it’s so important to invest in retirement as soon as possible. Setting aside $50 a month can add up if you start now instead of later.
Manage student loans and other debt
Many people coming out of college may have student loans or other forms of debt, like an auto loan or credit card debt. Cleaning up your debt sooner than later can ultimately pay big dividends later down the line when your income increases. By sticking to a budget and living within your means, you can minimize the interest you pay and maximize where your income goes.
Think of it this way: when you’re in debt, a portion of the money you earn is already spoken for. That means you can’t spend that money on savings goals like vacation, a house, or retirement. It also means you can’t spend that money on necessities like rent or groceries. If you have $450 of minimum payments each month and earn $4,000 after taxes each month, that means that 11% of your monthly income is already owed somewhere else. By paying off your loans and other debts as quickly as possible, you’d effectively give yourself an 11% raise.
Saving in your 30s
Your 30s can be exciting, as you’re likely earning more money thanks to advancing your career. You may also now be married or have started a family, which is a great time to review and think through your financial priorities.
Define and balance your priorities
Priorities is the keyword when it comes to saving in your 30s. If you’re married and don’t have a family, it’s a great time to discuss with your partner whether you intend to start a family or adopt. If you have children, now is a great time to think through the life you want to provide for them. Will you help them pay for college if they attend? Are you interested in budgeting to allow them to pursue any extracurricular activities they may show an aptitude or interest in?
When you get married or have another child, you’ll also want to take stock of your life insurance policy to be certain that you have appropriate coverage. While it can be morbid to think about setting up a will and getting the right insurance coverage should you pass away, these things are best settled as you age to reduce their complexity.
As you grow older in your thirties, reconsider your answers to these questions and any other life changes that may be on the horizon or have cropped up. Ensuring that your budget stays responsive but still allows for some proactive money moves is the secret to making the most of saving in your 30s.
Invest for the future
After defining your priorities, ensure you’re investing in your future. In most cases, you’ll be earning more money now than you were in your 20s, so it’s a good idea to increase your savings rate for retirement if you haven’t already.
Generally speaking, doing so every time you get an annual raise is a good time since you’re less likely to feel it. For example, if you get a 3% cost of living increase to your salary each year, bumping up your 401k deduction by 1% is much less likely to be felt in your weekly paycheck since you’re still earning 2% more than you were.
Another way to invest in the future is to invest in your health. If you have health concerns or mobility problems when you retire, you may be unable to make the most of your retirement income. Visiting the doctor regularly, maintaining a healthy diet, and getting exercise are ways to increase your lifespan and your ability to enjoy life to its fullest.
Focus on college savings (if you have children)
If you want to help your children with college costs, starting a 529b account is a great way to use compound interest to your advantage. Especially with higher education costs continuing to balloon, having time and compound interest on your side is a solid plan to help your children. Making this a priority as soon as you have children can help tremendously, as you only have 18 years before your child applies to college.
Manage your debts
As you enter your 30s, you may have taken on other, larger expenses — some of which may have involved incurring additional debt. Auto loans, graduate school, and mortgages are all debts that may now be on your financial plate. Similar to the advice for handling debt in your 20s, these are the sorts of things you should pay off as quickly as possible. Doing so will help free up your budget for other financial responsibilities incurred on your way to 30 and beyond.
Saving in your 40s
Once you hit 40, you’re only 25 years away from retirement. Here are a few things to consider regarding your finances during this decade.
Assess your progress
The average life expectancy in the United States 2020 was 77 years old. This means that once you hit 40, you could be halfway through your life. While many people live well into their 80s or 90s, that doesn’t change the fact that 40 is a great age to assess your progress when it comes to your savings goals. Here are some things to consider:
- Are you happy with the number in your retirement account?
- If you have children and are saving for their higher education, are you happy with their college savings?
- Are you debt-free? Where do you still have debt? How quickly can you pay it off?
- Do you anticipate any medical expenses or long-term illnesses that may require additional money beyond Social Security and your retirement account?
- How good are you at sticking to your budget? Does it need adjusting?
Answering these questions for yourself and with your partner can help give you some direction as you move into your 40s. The question about budgeting is particularly interesting because many of our financial habits may feel intractable at this stage of life. Even so, if you feel like you need to find extra money to save for retirement or your children’s education, scrutinizing your budget more closely can be a really helpful step when freeing up your money for other priorities.
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Increase your retirement contributions
With retirement age 25 years away, this is a good time to get even more serious about your retirement contributions. Typically, by your 40s, you should be close to debt-free except your mortgage. You are also in some of your prime years for earning in your 40s, regardless of gender. As such, you should have more income to increase your contribution to your retirement accounts.
If you need a more targeted investment strategy, your 40s may be a good time to discuss investment advice with a financial advisor. An advisor can assist you with calculating how your plan is progressing and whether your retirement income distributions from the stock market and Social Security will be enough to support the life you want to lead once retired.
Reassess your insurance needs
Like in your 30s, your 40s are a great time to reassess your insurance needs. Knowing that your life insurance annuity is there to support your family or partner if you die can give you the peace of mind to live life to the fullest as you grow older.
Saving in your 50s
Fifteen years from your target retirement age, your 50s are a time to set the stage for your desired retirement. Here are three major tasks to complete as you near retirement.
Prepare for retirement
Take a look at how your retirement savings are looking. If you’re not happy with them (or even if you are), now’s a great time to really boost your savings. Once you turn 50, you’re eligible for catch-up contributions to your 401k or IRA savings accounts. In 2023, you can contribute up to an additional $7,500 yearly towards retirement.
Just because retirement is close at hand doesn’t mean that compound interest still can’t work its magic when it comes to your tax-free catch-up contributions. An additional $7,500 each year will earn you $188,467.67 total in 15 years at an annual rate of 7%, netting you $66,000 more than your total investment of about $112,000. Keep in mind that this is in addition to whatever else you have in your retirement account, so the earnings would be even higher with whatever other money you have invested.
Reduce debt
It’s now or never! Having debt in retirement can really cramp your finances since most people are expected to live on less from their retirement accounts and Social Security to make ends meet. Remember that if you can get your debt-to-income ratio down low enough, the only fixed costs you’ll need to worry about in retirement are property taxes, utilities, and other bills.
Of course, this assumes you can pay off your mortgage; however, if you got your current 30-year mortgage back in your 20s or 30s, that is reasonable as you approach retirement.
Review your will or estate plan
As you approach retirement, it is a great time to review your will or estate plan. Life can change drastically from decade to decade, so ensuring that your assets and liabilities will be appropriately taken care of after you pass away can be a helpful way to enter retirement without these sorts of tasks weighing on you. Nobody likes to think about dying; however, by setting your finances in order well in advance, you can be sure that your last wishes will be handled appropriately when you do pass away.
Saving in your 60s (and beyond)
When you turn 60, retirement is so close you can almost taste it. Here’s how to save in your 60s — and beyond.
Transitioning into retirement
Not everyone makes the transition into retirement as easily as they imagined. After all, most people work at least 40 hours a week each week and have been doing so for decades by the time they finally get to retire. Figuring out how to spend that time can be challenging at first.
When you transition into retirement, keeping track of your spending with a budget is still important. Remember that your retirement account still needs to earn annual interest to allow you to live off this income until you die. While that may mean reducing expenditures in some areas, it could also free up your money to pursue other things you’ve put off, such as travel.
Planning for long-term care
Some people enter retirement with health issues. Others know to expect heart problems or cancer because of family histories. No matter where you land on this spectrum, it’s important not to spend so frivolously that you can’t plan for long-term care. Determining what you want to do should you need to be hospitalized or require more specialized care before facing that decision can be incredibly helpful for ensuring that you don’t place an undue financial burden on your immediate family should you have to cross this bridge.
Planning for your legacy
How do you want to be remembered? As you have a clearer picture of your retirement income, you may find other ways to spend your money on things beyond yourself. Whether this is endowing a scholarship at your alma mater, donating generously to a charity you care about, or contributing to creating a new business or building, your money is one way to help achieve the legacy you want to leave on the world. If you can make these sorts of financial moves, they can be incredibly rewarding and give you a great sense of fulfillment.
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The bottom line
Most everyone knows they should put money in a savings account for the future, but how should they plan for how much to save? Using the above strategies, you can ensure you have the right frame of reference for saving at each stage of your life. Some pages focus more on setting the stage for smart financial habits, while others focus on providing for your family or the life you want to lead in retirement. No matter how old you are, adopting these mindsets can be the difference between making the most of your money or just living on autopilot.
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Writer
Brent Ervin-Eickhoff is a Chicago-based writer, stage director, and filmmaker with a background in digital marketing and content creation. In addition to Joy Wallet, Brent has written for Complex, Volkswagen, HowlRound, Picture this Post, and Third Coast Review, among others. He currently serves as the Associate Director of Marketing for Content Creation at Court Theatre at the University of Chicago. Brent graduated from Ball State University with Academic Honors in Writing.
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