Make The Most of Every Decade
This may not come as a big surprise, but Americans are not saving enough for retirement. The average American has saved $95,577, but this number hides the true state of affairs – the median retirement savings across all ages is only $6,060.[i]
There is no magic formula to determine the amount you need to save. A combination of many factors will ultimately dictate what a person will need in retirement, ranging from the economic environment, age of retirement, expected lifespan, standard of living, health costs and more. But, it is clear the average American needs to save quite a bit more. While there are many things outside of our control, there is a lot we can do to put ourselves in a stronger position for retirement. Below is a brief discussion that can serve as a general guide for setting financial priorities that evolve, as life does, over the years.
In your 20s…
Time is your best friend. Even if you can’t save much now, the effect of compounding growth means dollars saved now grow significantly faster over time. One of the biggest challenges twenty-somethings face is a low risk tolerance, likely the result of growing up in times of financial uncertainty from 9/11 to the recent recession. Having seen the impact of economic downturns on parents, families and friends, many in their twenties are afraid to take age-appropriate investment risks like investing more heavily in the stock market. The infographic below shows that millennials invest in the stock market the least of all generations, despite having the most time to ride out volatility and accumulate wealth for a retirement still far in the future.
Adding to risk aversion, many in their twenties also struggle with low financial literacy, student debt and other financial obligations that come with starting a career and entering adult life. We are passionate about sharing our knowledge, so if you have questions about early career investment strategies, please let us know. We are always available to have these conversations!
Savings goal: Have the equivalent of your salary saved by age 30.*
In your 30s…
Now is the time to live within your means and save as much as you can, even as your expenses are increasing. Your thirties are important for growing your savings and benefitting from compounding interest, which is critical to generate the returns you need for retirement. One challenge for those in their 30s is increased expectations – many expect to have the same standard of living they remember growing up. While you likely earn more now than in your twenties, you also likely have more financial obligations (house, car, kids, etc.), making it easy to overspend, and just as easy to under-save. Many in their 30s find the many different types of investments and investment strategies overwhelming and confusing, but having a clearly defined plan and strategy in place now will make things easier down the road. Another important point: especially if you have kids, make sure you have life insurance. It’s the most affordable when you’re young and healthy, and protects your family at a time when you have the least amount saved and some of life's biggest costs still ahead of you (mortgage, college tuition, etc.).
Savings goal: Have three times your salary saved by age 40.*
In your 40s…
I know it may sound early, but now is the time to be actively preparing for retirement. Your family and your house are likely two of your biggest financial commitments. First, the house. It is important to think about the timing of paying off your mortgage. Conventional wisdom is to pay off your mortgage before you’re retired and on a fixed income, but that may not always be the best solution. One important caveat to consider is that it is much more difficult to get a mortgage once your regular income stops. When it comes to family, you’re likely dealing with typical living expenses as well as the hefty price tag of college. The average cost of college is now $133,920 for a private college ($33,480 per year) and $38,600 for a public in-state university ($9,650 per year).[ii] Over the long-term, college tuition has risen nearly 6% above the rate of inflation.[iii] The cost of tuition will certainly impact your ability to save for retirement, not to mention the opportunity cost of not having that money growing in the market. Being thoughtful about balancing the priorities of your retirement and your kids’ education should be well thought-out in advance, and we can help with that.
Many in their forties are also taking on (or anticipating) care-related expenses for aging parents. As seen in the infographic below, more than a third of adults in their forties are investing time and/or money to both their adult children and parents.
Despite the increased costs and financial needs during this time in your life, the more you can stick with your savings plan, the better off you’ll be. The good news is, time is still on your side, but more than ever, it’s important to have a plan in place.
Savings goal: Have six times your salary saved by age 50.*
In your 50s…
Now is the time to ensure you are making smart decisions to set yourself up for a successful retirement. The fifties are often when the reality of retirement starts setting in, for better or for worse. You may have made it through the college years, or still be working through them, but the kids are (or will be) out of the house soon, and it may feel like you can finally increase your standard of living. However, it can also be a time when people realize they do not have enough money saved for retirement. On the bright side, you’re entering your peak earning years and that can help offset some of what you weren’t able to accomplish in your earlier years.
As you look at the transition into retirement, it’s important to continue contributing to retirement funds and start working toward a lifestyle that can be maintained and afforded in retirement.
Savings goal: Have eight times your salary saved by age 60.*
In your 60s (and beyond)…
You’ve made it to the retirement decade – congratulations! While you can start withdrawing from Social Security at age 62, waiting until age 70 will result in monthly benefits that are 76% higher, so it can be a benefit to wait if you can. Similarly, the longer you can keep from withdrawing from your retirement accounts, allowing them to continue to grow tax-deferred, the better.
Once you reach retirement, please – enjoy it. Your first decade of retirement will be your most active, so go out and make the most of it. Of course, it’s important to still be mindful of your finances, but you’ve worked hard to get to this point, and now is the time when you can enjoy it the most. It’s also a good time to be thinking about your future goals, particularly when it comes to your children, grandchildren and/or philanthropic desires.
Savings goal: Have ten times your salary saved by age 67.*
*The savings goals listed are rough estimates that include retirement accounts, home equity, inheritance, sale of a business and other sources. Not everyone will be in a position to achieve these levels of savings, and that’s okay! The point is to start with honest conversations and a general guide to help increase your savings and make proper planning decisions to give you the greatest chance of achieving your goals.
We hope this article is a helpful starting point, and we are here as a resource to help you on this journey!
[i] Natixis Global Asset Management Releases Findings from the 2017 Global Individual Investor Survey