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 you 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.
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.
If you’re married, 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 mortgage insurance.
In your thirties and forties. If you have children, it’s a good idea to be saving for their educations. Consider 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.
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.
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’ve 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 2014, below age 50, there’s a ceiling of $5,500 for contributions to IRAs and $17,500 to 401(k) plans, but at age 50 those limits increase to $6,500 and $23,000, 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 50s to have accumulated only about half of what they’ll need by age 65, yet still be on track for a well-funded retirement.
In you sixties. 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.
Copyright © Integrated Concepts 2012. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.