Life has a funny way of getting in the way of important financial decisions we need to make. Understanding where to start and what to do can be very overwhelming. To help simplify the process, here are a few key decisions you should make organized by decade. If you’ve already missed that decade, don’t be discouraged. The next best time to make a decision is now.
GET STARTED in your 20’s:
Establish good financial habits. There’s no better time than in your 20’s to practice self-control and good financial prudence. Don’t allow yourself to spend more than you make. Learn the importance of proper budgeting and avoid getting into credit card debt. This can be one of the biggest downfalls in future decades if left unmanaged. Start building an emergency fund. Take a little from each paycheck to put away for a rainy day. You never know when you might have a major car repair, are laid off from a job, or have a medical emergency. You don’t want to incur credit card debt to pay for these expenses.
Start contributing to a retirement plan. If you are working, you should be contributing to a retirement account. Whether you contribute to your employer plan, or to a Traditional or ROTH IRA, now is the time. The time value of money can play an important role in helping you establish wealth over time. The sooner you start the better. “Pay yourself first” is a vital motto to adopt.
Obtain health insurance. After age 26, you will no longer be able to fall under your parent’s insurance. Don’t forget to enroll in your employer’s health insurance plan. Cover yourself for unexpected or catastrophic events that could otherwise leave you financially distraught and could adversely affect your future financial success.
GET SERIOUS in your 30’s:
Maximize employer match. It’s not uncommon for many who contribute to an employer plan at work to unintentionally forfeit employer matching contributions because they are not contributing enough. Many employers will match 100% of contributions up to 3% of your salary. So, make sure you understand what that matching percentage is, and contribute at least that same amount or more. You don’t want to leave free money on the table.
Invest for growth. As you start to save and invest your money, keep your eye on the end goal. Are you investing for retirement? If so, investing for growth is appropriate and can help you accumulate assets more rapidly than if left in cash or bonds. Be sure to analyze your own risk tolerance before being too aggressive. Understanding your own risk tolerance and time horizon is an important piece in determining what percentage of your portfolio should be in stocks or bonds. Choose a mix that allows you to sleep at night, while still helping you reach your future goals.
Buy life insurance. If you have children or others that depend on your income, now is a good time to purchase life insurance. Life insurance is often offered as an employer benefit, but obtaining a stand-alone policy while you’re young is also a good idea. If you switch jobs, your group life insurance may not be portable. You have age and health on your side, which will make your premiums cheaper now than if you wait for 5 or 10 years. A good place to start is 7-8 times your salary, but don’t forget to consider your own salary increases over time. What expenses would need to be paid for if you were to pass away? Childcare, college expenses, mortgage, funeral expenses and living expenses for those you leave behind should be factored into the amount of death benefit required.
GET MOMENTUM in your 40’s:
Review your plan regularly. By now you should be gaining some momentum. You should be saving regularly. It’s important to review your plan annually to make sure you are still on track. If you need to make any adjustments, or increase your savings, better to know now than a few years out from retirement.
Review your estate planning needs. Estate planning is your way of taking the pressure and stress off of those you love in case of death or incapacitation. Formalizing your wishes through a medical directive and living will can alleviate any undue complications in the future. A power of attorney is essential to authorize someone to act on your behalf if you are unable to do so. Do you need a living trust? Let an estate-planning attorney help you determine what’s best for you.
Understand your taxes. Many investors overlook the impact their decisions can have on their taxes. Taxes play an important part in your financial plan. It can have an impact on whether you pay taxes now or later, pay short term or long term capital gains rate, defer taxes on the disposition of investment property and more. Understanding your tax bracket now and projected tax bracket in retirement is vital in developing a comprehensive, tax-efficient retirement plan.
GET READY in your 50’s:
Make catch-up contributions. The IRS has a provision that allows investors age 50 and over to invest an additional amount into their retirement plans, known as catch-up contributions. Don’t miss out on this opportunity to increase your savings, defer more taxes, and continue to build your nest egg.
Assess long-term care needs. While you’re still healthy, underwriting and premiums for long-term care policies will be more favorable. Assess your long-term care needs. Can you self-insure? Will you need to purchase long-term care insurance to offset future expenses? Long-term care expenses can put a substantial financial burden on a family. Protect yourself and your loved ones.
Review future income needs. If you haven’t already, run some retirement income projections. Determine your income sources for retirement. Do you have a pension? How much will social security provide? Do you have an inheritance? Will your retirement and other assets sufficiently provide the income you desire in retirement? Knowing these figures will help you determine if you need to make some changes in your plan. Will you need to work longer? Save more? Or live on less? You still have some time to make some adjustments.
GET IT DONE in your 60’s:
Determine social security strategy. Deciding when to take social security is unique for each person. Should you take it early because you’re in poor health? Can you wait until 70 since you’re still working? Married couples often have a different strategy than those who are single.
Enroll in Medicare. Three months before and after your 65th birthday, you are eligible to enroll in Medicare. If you are still working, you’ll need to know how Medicare coverage works with your current insurance. Do you still have family members on your health insurance policy? How will coverage continue? What will Medicare cover? Will I need supplemental insurance? You may pay a penalty if Medicare is delayed, so don’t leave this to chance. Find out the details at medicare.gov.
Review retirement income and expenses. Before your retirement becomes a reality, it’s so important to understand your expected income and expenses in retirement. You don’t want to be unprepared and surprised because you failed to properly plan. It’s much easier to stay working than to retire and go back to work, if necessary.
Although there are many things to consider as we plan for a successful retirement, just getting started is half the battle. If you haven’t started….start. If you have started…keep going. It will pay off in the long run!