We are all unique, so there’s no one financial plan that will suit everyone. But that doesn’t mean there aren’t some broad guidelines to fit common situations. So, when it comes to your savings, here are some benchmarks to indicate whether you’re following the right priorities and are on track for meeting your financial goals:
In your twenties.
Typically, this is the age when you’re likely to have the lowest income in your working life, but also the fewest dependent-related expenses. At this stage, you should have two top priorities: First, you should concentrate on building an emergency fund equal to three to six months of living expenses held in short-term savings vehicles. Second, you should begin putting money into an individual retirement account (IRA) or 401(k) retirement plan. The advantage of beginning to save for retirement at this age is time: in a tax-deferred account, even relatively small amounts can grow into significant assets when you have 35 to 40 years to harness the power of compounding. For example, if you contribute just $2,000 a year to an IRA and it grows by 8% a year, after 30 years, it could be nearly $227,000 and more than $518,000 after 40 years. This example is provided for illustrative purposes only and is not meant to project the performance of an actual investment. You may have a third priority: saving for a down payment on a house. It’s best if you can accumulate 20% of the price of the house to avoid having to pay private mortgage insurance, but whatever you can accumulate will help keep your mortgage payments lower.
In your thirties and forties.
If you have children, it’s a good idea to be saving for their educations. Consider a tax-advantaged 529 college savings plan that you can invest in the stock market. The principle
here is that if you have more than five years before college bills start coming due, you can afford to take some risk to potentially achieve a higher rate of return than you might from bonds or other safer investments. Now you should begin to increase your contributions to your retirement accounts. The more you can put aside now the better, as you still have 25 to 30 years of compounding. Your emphasis should still be on the stock market; although by your late forties, you might consider increasing your bond investments to guard against losses due to market shocks.
In your fifties.
This is normally the time when people make their largest contributions to their retirement accounts because their incomes are close to the highest of their careers; and if they have any children, they’re typically out of college and on their own. Federal limits on annual contributions to retirement plans are more generous at this age, too. For example, as of 2016, below age 50 there’s a ceiling of $5,500 for contributions to IRAs and $18,000 to 401(k) plans, but at age 50, those limits increase to $6,500 and $24,000, respectively. It takes in-depth calculations to determine how much your retirement portfolio should be and whether you’re on track to meet the accumulated value of the nest egg you’ll need to retire. That said, it’s not unusual for people who are in their fifties to have accumulated only about half of what they’ll need by age 65, yet still be on track for a well-funded retirement. (If your account balances are considerably less than half of what you’ll need, you might have some catching up to do, or it might be necessary to consider retiring at an older age.)
In your sixties.
This is the home stretch of the period during which you acquire assets for retirement. As you enter this decade of your life, you should still be contributing more than you ever have to your retirement accounts. With less than five years before you retire, you should consider
reshaping your portfolio to include greater percentages of lower-risk investments. It’s never too early to create or update your financial plan, so please feel free to call.