If you started investing $5,000 a year for retirement at age 25 and earned 6% returns, you'd have $825,000 by the time you turned 65.
But what if you waited until 35 to start investing? At 65, you'd have just $425,000.
If you're in your 30s with no retirement savings, you probably don't need a lecture about the cost of delaying investing. Lots of people don't start saving in their 20s, not because their spending habits are out of control, but because they can't afford to on an entry-level salary, especially if they're struggling to repay student loans.
The good news is, when you're in your 30s, you still have plenty of time on your side. Follow this catch-up plan.
1. Contribute to both a 401(k) and a Roth IRA if you can.
If your employer offers a retirement plan, like a 401(k) or 403(b), your first priority is to contribute enough to get the full company match. But since you're playing catch-up, you probably want to save beyond your employer's match.
Try to max out an individual retirement account (IRA), if you have additional money to invest. IRAs typically have a lot more investment options than 401(k)s. For people under 50, the most you can contribute to an IRA in 2020 is $6,000.
A Roth IRA is often a good choice because you forgo a tax break now in exchange for tax-free income in retirement. Plus, you can withdraw your contributions (but not your earnings) any time without taxes or a penalty.
If you're a freelancer, independent contractor, or small-business owner, you can save using a combination of IRAs and retirement plans for self-employed people.
2. Treat paying off high-interest debt as an investment.
If you have lingering credit card debt, getting rid of it is one of the best investments you can make. The average credit card APR is above 16% for people who carry a balance. That means every $1 you put toward credit card debt saves you $1.16 over the course of a year.
Your 30s are a great time to shed yourself of credit card debt for two reasons: For starters, it may be the first time you can actually afford to do so if you spent your 20s broke. Secondly, if you can learn to live within your means, you'll reap the benefits for decades.
If you have other debt above 7%, focus on paying that off as well before you invest above your employer's 401(k) match. The decision to invest versus pay off debt usually boils down to whether you're paying more for debt than you could expect to earn. You could expect returns of about 7% on average after inflation if you invested in an S&P 500 index fund, so first tackling debt above this amount makes sense.
3. Err on the side of more risk.
When you're in your 30s, you probably have two or three decades left until retirement. That means you shouldn't worry about stocks crashing because your investments have plenty of time to rebound.
It's essential that you take on enough risk to generate strong returns, especially if you're getting a late start. That doesn't mean you should invest in a portfolio that gives you heart palpitations, but you can't be overly conservative, either.
You'll want a portfolio that's mostly invested in stocks with a small percentage invested in bonds. One good guideline is the Rule of 110: Your stock allocation should be 110 minus your age. So if you're 35, you should own 75% stocks and 25% bonds.
4. An emergency fund is still a priority.
A three- to six-month emergency fund is vital no matter your age. But it tends to get more important in your 30s versus your 20s because you're more likely to have kids and homeownership in the mix.
It may seem counterintuitive to have money parked in a savings account earning less than 1%. But having that cushion helps you avoid tapping your investments in a crisis. Raiding a retirement account early often results in taxes and penalties, plus you may have to sell investments when they're down.
5. Focus on your retirement before saving for your kids' education.
Your child will have options for funding their education, including working part time, financial aid, scholarships, student loans, and choosing a lower-cost school. But your options for funding your own retirement are limited. Once your retirement is on track, you can start saving for your kids' college.
You need time to let your money grow, but fortunately you still have plenty of it in your 30s. Make the most of it by prioritizing your retirement.