Most people understand the value of saving for the future. Of course, it’s important to have enough money to live now, but without some type of saving plan, the future can be difficult. A good question to ask is what should my goals be throughout my adult life. This article will look at answering that question.
20s and 30s
We will look at these two decades together, because they share overall goals. These are the decades of getting started in your adulthood. Finishing formal education (in whatever form that takes), beginning a first career job, making your own housing arrangements, arranging transportation (perhaps purchasing a car), possibly getting married and starting a family. Each of these are potential goals for the period of your 20s and 30s.
During this period you should work on:
- Developing a saving plan and building your financial safety net / contingency fund (sometimes called an emergency fund). Three to six months expenses is a reasonable starting point.
- Arranging for your own insurance: health, life, disability, home, auto and liability
- Ensure your beneficiary arrangements are in order. These likely will change somewhat over the years. This also applies to your retirement accounts.
- Opening and contributing to a retirement investment plan (e.g., 401(k) or 403(b) through your job).
- Paying down student debt.
- Develop your credit worthiness by carefully managing credit-based purchases and debt repayment. This is a good time NOT to become overloaded with debt. A good target for debt payments is no more than 36% of your gross income. Less than that definitely is better.
- Add enough to savings to have a down payment to purchase a home.
This is the period during which most people are solidifying their careers, perhaps raising children, purchasing a first home or a new home, and generally establishing a strong life and financial foundation.
During this decade you should be paying down debt and increasing contingency funds to have money available for major financial needs as they arise (e.g., replacing a water heater, furnace, air conditioner, unexpected health care expenses not covered by insurance).
- Increase retirement investing to at least 15%+ of income.
- Establish non-retirement investment account to build net worth.
- Establish and contribute to college savings accounts as appropriate and if not done during your 30s.
- Work toward maintaining a debt-to-asset ratio of no more than 50% (i.e., debt no more than 50% of assets). Less is better.
- Keep up with training and education to remain employable and to advance your career.
Hopefully, during this decade you will have established yourself financially. You are confident in your career path. Family life is strong. Debts are manageable and growing smaller. Net worth is increasing. Children (if any) are moving out of the house and beginning to build lives on their own.
However, this is also the time period when many couples divorce, creating a hole in both life and finances (this is one very good reason to focus on your relationship during the preceding decades; life counseling can provide guidance). Due to illness or financial decline, parents may become dependents during this decade. In some situations, this may mean making alternative living arrangements for them (e.g., extended care, nursing home, adult care).
- Contribute the maximum allowable to retirement plans (remember that qualified plan and IRA contribution limits increase during this period to allow you to “catch up”).
- Outstanding debt should be approaching zero.
- Pay increases from jobs should go toward continuing to build net worth.
Retirement may be right around the corner. Are you ready? This is a good time to learn more about Medicare benefits. You also will want to learn about and make decisions around Social Security retirement benefits and when to begin taking them.
The same applies to any pension plan benefits you may have. If you do not have a good working relationship with a trusted financial advisor, now is a very good time to research and establish one. A competent advisor can help you make decisions about retirement account distributions, tax management, ongoing investment planning and the like.
This can be a good time to consider how you want to structure your “retirement”. Do you want to work, start a business, volunteer and develop a charitable giving plan, travel, etc.
- If at all possible, try to have your home mortgage and all other debts paid in full.
- Focus on filling up retirement accounts so you can fully fund your budget.
- Develop a distribution plan from all retirement accounts that will ensure your money lasts throughout the retirement period.
- Revisit your estate plan to ensure all arrangements match what you want to have happen.
- Make arrangements (i.e., medical directive, springing power of attorney, etc.) to address potential incompetency and general health care concerns.
- This likely will require working with an attorney in addition to what you can do on your own.
- Consider the value in establishing trusts for any special needs dependents as well as for general distribution arrangements.
- Double check all beneficiary arrangements and make any adjustments required to comply with your current wishes.
- Make a plan to choose a retirement date for yourself and your spouse or partner (if relevant).
Upon your retirement most people will no longer contribute to retirement accounts. However, you will want to regularly review and update your plan to ensure it continues to serve you as planned. It’s better to make necessary changes sooner (based on life and economic changes) than waiting too long.
You can use the preceding as a guide to developing your own saving and spending plan over the years. While this has not been presented as the “perfect” plan, it should provide guidance as you develop the right plan for you. Good financial planning leads to good results. This can be a template for your planning.