How to Plan for Retirement in Your 30s

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When it comes to building your plan for retirement, your 30s may very well be the most important decade for your plan. For many people in that age range, it's a "sweet spot," where:

• Your career is far enough along that you're making a decent income.
• You've gotten past the expensive start-up costs of your independent life from your 20s.
• You've still got time on your side -- though not as much as you did in your 20s.
• Your parents are still able to care for themselves.
• Your children haven't yet reached the expensive college years.
• Your own health is still good enough that you aren't facing daunting medical expenses.

That combination of decent income, reasonably low expenses, and still sufficient time for compounding to work for you can create an environment in which you have your best shot of making serious savings progress.

Why plan for retirement in your 30s
Say you'd like to retire at a traditional retirement age of 65, and you think you'd need a cool $1 million nest egg to supplement Social Security and any pension you may receive. The table below shows how much you'd have to save each month to get there, depending on the age you start and the annual rate of return you earn along the way:

Table calculations by the author.

While there are no guarantees in the stock market, over the long haul, stocks have returned near that 10% annual return level, though those returns haven't come in a straight line. If you start in your 30s, you've got decades to let the market work through its gyrations, giving you a decent shot of seeing your overall returns within the range of that table. The later in life you start, the bigger the risk of low to negative market returns over your investing timespan, and the more you'll need to branch out to lower total rate-of-return investments like bonds to provide higher certainty of those returns.

That means waiting much beyond your 30s can become a double-whammy. After all, the longer you wait, the more you have to sock away each month to get to that $1 million target, no matter what rate of return you achieve. And since the longer you wait, the more you need to sacrifice potential returns for likely (though lower) returns, the more you need to sock away each month to make up for those lower potential returns.

In other words, a 30-year-old could legitimately shoot to make millionaire status by age 65 by investing somewhere between $263 and $436 per month for the next 35 years. A 50-year-old starting from scratch, on the other hand, might need to scrape up cash closer to that $3,439 to $4,064 level to have a higher likelihood of hitting that $1 million target by age 65.

If you think it's tough to come up with a few hundred a month to invest in your 30s, imagine having to go from investing $0 to $4,000 per month overnight once you hit 50 -- to wind up in the same place.

The tools at your disposal
As long as you have cash available, you can invest it in a standard brokerage account. In your 30s, if you're drawing a paycheck or contractor income (or are married and file your taxes jointly with someone who does), you're also eligible to contribute to an Individual Retirement Account -- IRA for short. A 30-something can contribute up to $5,500 a year into his or her IRA as long as that person or his or her spouse (when filing jointly) earns enough in taxable compensation to cover that contribution.  

IRAs come in two general types: Traditional and Roth. In both types of IRAs, the money you've invested grows tax deferred -- you pay no taxes on gains or dividends on money earned on the account as long as it legally remains in the account. In a Traditional IRA, you may be eligible for a tax deduction on your contribution, but when you take your money out, it's taxed as ordinary income. In a Roth IRA, you contribute after-tax money, but when you make qualifying withdrawals in retirement, the money comes out of the account tax-free.

In addition to IRAs, if you or your spouse work for a company that offers a 401(k), 403(b), TSP, or similar qualified employer-sponsored retirement plan, that plan can also be a great way to save for your future. Qualified retirement plans also come in Traditional and Roth varieties, but they have a few extra features that make them appealing.

For one, contributions can come directly out of your paycheck, making it an automatic investment opportunity. For another, the limits are much higher than IRAs -- a 30-something can contribute up to $18,000 per year. In addition, your employer may offer you a match on your contribution -- handing you additional money above and beyond your own contribution to help build your nest egg.

Your best shot for a comfortable future
Whether you invest in a standard brokerage account, an IRA, an employer-sponsored plan, or some combination of all of the above, the most important thing you can do is get started right away. In your 30s, you're likely to have the best balance between a decent income, relatively low expenses, and time remaining to build your nest egg to make it a very important decade for your retirement plan.

Take advantage of the time you have, the tools at your disposal, and this unique window of relatively low expenses combined with a relatively high income to start executing the plan that will get you there. A comfortable retirement is likely within your reach, but you need to take steps toward it now to keep it that way.