Recently, my husband and I took care of our 12-month old granddaughter while our daughter and son-in-law took a much-needed vacation together. When they dropped her off, their parting words were, “She is almost ready to walk, but make sure she waits until we get home!”
Famous last words… Of course, as soon as they left the house, she was trying to walk – literally everywhere. And after about 24 hours she was taking her first baby steps. By the time they arrived back three days later, she was walking (a little unsteadily but walking none-the-less) and was very proud of herself. Great strides in just a few days but predicated on all of the trial and error and lessons learned in the months before.
Financial planning is a little like this. You’ll make mistakes along the way – everyone does. But you will do a lot of things right as well and the important thing to remember is that your financial health is based on doing the little things right, all along the way.
So, what should you be doing when you are 22, 52 or 72? Here are three important tips for each decade.
In Your 20’s
This is when those baby steps begin. If you start now with just a small amount of regular savings, because you have time on your side, your nest egg will be significant by the time you are ready for retirement.
- Start with building a safety net. Make sure that you have three months of living expenses readily available in your bank account.
- Live within your means. Figure out how much your monthly living expenses are using any number of available online tools or apps. Include “savings” in your budget and don’t forget student loan payments if you have them.
- Begin to save for long-term goals. If your company has a retirement plan with a match, try to invest an amount that will make you eligible for the entire match. What are your other long-term goals? Would you like to purchase a home? If so, determine what you will likely spend and set up an account to save for a down payment (typically at least 10% of the purchase price but preferably 20%).
In Your 30’s
This is where the expenses really start to add up. By now, you may be married and have a child (or two) which means additional expenses. You are also likely to have a mortgage and with that home comes additional budget items (property taxes and maintenance expenses).
- If you are not yet saving enough into your company retirement plan to get the entire match, start there. Then, set a goal to increase your retirement savings by 1% each year until you are maximizing your contributions ($19,000 for those under 50 in 2019 and increasing to $19,500 in 2020).
- If you have children, consider setting up 529 plans for their college education. Just like retirement savings, the earlier you do this, the easier it is to achieve your goal by the time your child reaches college age.
- Make sure to have estate planning documents in place. At this point in your life, you should have a will, a financial power of attorney and a healthcare power of attorney. These are easy to have drafted and should not be expensive. But, in the unlikely event that they are needed, they are invaluable to have in place.
In Your 40’s
You are now entering your high earning years as an adult. Your expenses have probably increased if your family has grown or you are responsible for other loved ones.
- Review your insurance portfolio. At this point, whatever your company provides is likely not enough coverage in terms of life and disability insurance. Consult with a qualified professional to see if you should add coverage (either individually or by using a supplemental plan through your employer).
- As your expenses grow, your need for liquidity will grow as well. Stretch that three-month buffer in the bank to six months of living expenses. The peace of mind you will get from knowing that you are covered for that amount of time in the event of an unexpected life event will be well worth the sacrifice.
- Remember to have fun. You are likely working hard at this point and have many commitments and priorities. How do you like to relax? Is it travel, working out, having a quiet place to read a book? Make sure to set aside time (and part of your budget) to reward yourself for your hard work.
In Your 50’s
All of a sudden, retirement doesn’t seem that far off. But, if you have children, they are likely in college so there is a lot of competition for your hard-earned wages.
- Review your retirement savings. Once you turn 50, you can invest additional funds into your company retirement plan. The limit in 2019 for those 50 and over is $25,000 and increasing to $26,000 in 2020. Make sure you are maxing out your retirement plan but also see a qualified financial professional who can determine whether or not additional savings on top of your company plan is needed to meet your financial goals.
- Review your asset allocation. Up until now, you have probably been invested primarily in stocks. At this point, you should consider paring back your stock exposure somewhat, depending on your risk profile and timeframe to retirement. An investment professional can help determine what makes sense for you and when changes should be made.
- Consider long-term care insurance. Generally, long-term care should be considered as an option in your 50’s with a decision made by the time you are 60. That is because premiums begin to escalate after that point. Every situation is different and you may decide that you will opt not to have this kind of coverage, but make sure to make a conscious decision. Remember that “doing nothing” is a decision so make this one intentionally.
In Your 60’s
Retirement may be looming at this point or at least is not that far in the future. There are many decisions to be made. If you are not already working with a financial advisor, now is the time to establish a relationship to make sure you make all of the right moves as you enter this next chapter.
- Work out a retirement budget. Many people mistakenly believe that they will spend less in retirement than during their working years. In fact, many times just the opposite is the case as you have time now to pursue your passions and do things that you just did not have time for previously. Be realistic with your budget and based on that, discuss with your advisor what additional savings are required and a retirement date that will work with your financial goals.
- Determine the optimal time to apply for social security. Although you can take a social security benefit as early as age 62, generally if you are still working that is not advisable because of the penalties for taking it before your “full retirement age.” Your full retirement age will vary based on your year of birth but generally varies between age 66 and age 67. Many people actually elect to wait to take the benefit until age 70 regardless of their retirement age because your benefit will actually go up by 8% each year between your full retirement age and age 70.
- Understand Medicare and all of the ins and outs associated with what it does and does not cover. You will be eligible for Medicare at age 65 and if you are not eligible for coverage under a group plan at work, you should sign up then to avoid penalties. You will also need to consider supplemental coverage to cover expenses that are not covered by Medicare. Make sure to work with a qualified insurance professional to review what you need and when you need it.
In Your 70’s
You made it! All of that hard work actually wasn’t that difficult if you took “baby steps” along the way. Now is the time that you should enjoy the fruits of your labor and pursue the hobbies and interests that you may not have had time for previously. Enjoy your retirement! You got there one (very intentional) step at a time.
No matter which baby step you are on, there are decisions to be made that ultimately impact your and your family’s future, so make sure to leverage our team here at Atlanta Financial for additional tips and guidance to ensure you are on the path to success.