Retirement Advice for Every Decade

Retirement is a life stage you can save for at any age, and it's never the wrong time to start planning for it. Here, we'll review the various goals you should aim to meet in your 20s, 30s, 40s, 50s, and 60s. Specifically, we'll focus on building a healthy savings account and nest egg, maximizing your Social Security benefits, and establishing a long-term financial plan that'll buy you the security you deserve during your golden years.

Retirement planning: your 20s

When you're kick-starting your career, retirement might be the last thing on your mind -- but that shouldn't be the case. If you start setting money aside for retirement early on, you'll have a real opportunity to accumulate substantial wealth. That's because the sooner you start saving, the more you can use compound growth to your advantage.

In its simplest form, compound growth is the gains you earn on your previous gains. For example, say you have an investment worth $1,000, and it gains 10% in a year. Your stake has grown by $100 to $1,100. If it then gains another 10%, then your stake will grow by $110 to $1,210. As your investment grows, if it's growing at the same percentage rate, it will still grow faster over time, exponentially increasing your wealth. And the key ingredient of compound growth is time. That's why you need to start saving for retirement as early as possible.

But let's not get ahead of ourselves. Before you can focus on building your nest egg, you'll need to create a budget that maps out your existing expenses and shows you where you have room for savings. Creating a budget is easy -- simply list your recurring bills, factor in one-time expenses that pop up throughout the year, and compare your total spending to how much income you bring home after taxes are taken out. If there's not a lot of room for savings, you'll need to trim some fat.

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Assuming you can keep your expenses at a level that allows for savings, your first goal should be to save not for retirement, but for emergencies. You never know when you might get hit with an unexpected expense, and without cash reserves, you may have no choice but to rely on credit card debt -- and that's not what you want. Your emergency fund should have enough money to cover a minimum of three months' worth of living expenses, and ideally six months' worth.

Now let's get back to debt for a minute, because chances are you have plenty of it, whether it's of the student loan or credit card variety. While paying off debt shouldn't necessarily trump your retirement savings, it's something you should prioritize nonetheless. Federal student loans generally come with a 10-year repayment period, but if you can accelerate that schedule, you'll spend less money on interest and have more money available to fund your nest egg. Similarly, the sooner you pay off your private student loans or credit card debt, the less money you'll lose.

Once you have a fully loaded emergency fund and are on a good path toward paying off debt, you can really start working on that nest egg. If your employer offers a 401(k) plan, that's a good place to start.

Saving in a 401(k) is a pretty seamless process. You decide how much of each paycheck you want to contribute, and your employer will automatically deduct that sum. Better yet, most companies that sponsor 401(k)s also offer to match employee contributions to varying degrees. For example, your employer might match contributions of up to 3% of your salary, so if you earn $50,000 and contribute 3% of that amount ($1,500) each year, then your employer will pitch in another $1,500 for free. 

If you don't have access to a 401(k), you can always open an individual retirement account, or IRA, at your local bank or financial institution and save for retirement that way. The primary difference between the two account types boils down to annual contribution limits. In 2018, you can put up to $18,500 into a 401(k) and $5,500 into an IRA. You can save much more through a 401(k), but if you max out an IRA over the course of decades, you should be in good shape. Furthermore, with an IRA, you'll get access to virtually unlimited investment options, whereas most 401(k)s only offer a few dozen mutual funds to pick from. 

Of course, you don't necessarily have to stash your retirement savings in an IRA or 401(k). But because both accounts offer major tax benefits, they generally make the most sense. With a traditional IRA or 401(k), the money you can contribute is deducted from your taxable income for that year (this happens automatically with a 401(k), whereas with an IRA you'll have to claim the deduction yourself). Your money will then get to grow tax-deferred, and you'll only be taxed when you take withdrawals in retirement. Roth IRAs and 401(k)s work the opposite way: There's no immediate tax break for contributing, but your money gets to grow completely tax-free and then isn't taxed when you withdraw it later on. 

Once you open your retirement plan, you'll want to contribute as much money as possible. That may not be a lot in the early part of your career, especially if you're working on eliminating debt at the same time. But one thing you should do is take advantage of the fact that you're young and invest your savings aggressively. This means going heavy on stocks in your 20s and leaving only a small portion of your savings in bonds.

As a rough estimate, at this stage of life, you should put about 80% to 90% of your portfolio into stocks for maximum growth. Even if your contributions are modest, thanks to the power of compounding, you could save up a big sum over time if you start immediately and invest aggressively, as the following table illustrates:

TABLE AND CALCULATIONS BY AUTHOR.

Most 20-somethings can't manage to part with $1,000 a month. But if you keep your living costs low enough that you're able to save that much, you stand to retire with well over $2 million. Better yet, if you save in a 401(k) and receive a generous match, you might get away with contributing much less and still wind up with more than $2 million at retirement. Even if you can't save that much, if you save smaller amounts (such as $400 or even $200 a month) consistently, you'll do pretty well for yourself. And in case you're wondering, that 7% return is actually a bit below the stock market's average, which means that if you put most of your portfolio into stocks, that's a reasonable assumption.

Retirement planning: your 30s

Though you might spend much of your 20s focusing on financial goals other than retirement, your 30s are a prime opportunity to buckle down on retirement planning and saving. Ideally, you'll be mostly free of student debt, and you'll be earning more thanks to your years of experience on the job.

One important retirement-planning step in your 30s involves revisiting your budget. Chances are your expenses and earnings have shifted over the years, so take the time to map out a new budget that not only reflects your finances, but also gives you plenty of room for savings.

It also pays to boost your liquid savings in your 30s, especially if you've become a homeowner since establishing your original emergency fund. When you own property, there's a much greater likelihood of encountering unplanned expenses, and you'll want that safety net to avoid the temptation to dip into your retirement savings prematurely (something you should avoid doing at all costs).

Earning more money and having less debt means you should start increasing your retirement plan contributions, whether by $20 or by several hundred dollars -- it all depend on your budget and your priorities. In any case, with retirement still decades away, you need to invest aggressively so that compound interest can work its wealth-building magic.

Just as you did in your 20s, you'll want to go heavy on stocks to maximize your retirement savings' growth. At this point in your life, stocks should account for roughly 75% to 80% of your portfolio, as you still have plenty of time to ride out the market's dips.

If you haven't started saving for retirement prior to your 30s, you still have more than enough time to build some serious wealth. Check out the following table, which shows what your nest egg might grow to even if you completely neglected to save for retirement during your 20s:

TABLE AND CALCULATIONS BY AUTHOR.

Retirement planning: your 40s

Your 40s are a pivotal time career-wise. At this point, you've hopefully managed to climb the ranks and secure a higher salary than you earned in years past. At the same time, many 40-somethings who see an uptick in income also see their expenses increase, partly due to the fact that they feel they can spend more freely -- so one important thing to do at this stage is to make a point of avoiding bad debt -- particularly the credit card variety.

If you've reached your 40s and your earnings aren't where you hoped they'd be, it pays to do some research, see if you're being underpaid based on your job, and fight for a raise accordingly. This is important for a couple of reasons. First, the more you earn, the easier it will be for you to fund your retirement account. But just as importantly, your Social Security benefits are calculated based on how much you earn during your 35 highest-earning working years, so the more you make, the more you stand to collect when you're older.

Another thing you'll want to do in your 40s is start setting money aside for your kids' college and other near-term goals, such as home renovations. This way, you won't be tempted to tap your retirement funds to cover those expenses.

At the same time, this is the period when you really want to start ramping up your retirement plan contributions -- especially if your savings are limited or nonexistent to date. Though retirement is hardly around the corner at this point, your opportunity to take advantage of compounding is shrinking, so be sure to start funding your account as aggressively as you can. Also stay focused on stocks, which, at this point, should make up a good 65% to 70% of your portfolio (or more if you have a high tolerance for risk).

If you're wondering what your nest egg might look like if you start funding it in your 40s, here's your answer, depending on your level of savings:

TABLE AND CALCULATIONS BY AUTHOR.

As you can see, saving just $200 a month won't cut it if you're starting with nothing in your 40s. You may therefore need to seriously rethink your spending and start making room in your budget for more savings, even if your earnings are higher than what they used to be.

What expenses might you slash? If your home is eating up a large chunk of your income, you might look into downsizing and lowering what's likely your single greatest monthly expense. If you enjoy having a car but technically don't need one, unloading it and using public transportation instead could save you thousands each year. Another option? If you have the sort of job you can do from anywhere, you might consider relocating to a less expensive part of the country, where you'll get more for your money and therefore won't need to spend as much to maintain your standard of living. Either way, the key is to free up a decent amount of cash to catch up on retirement savings before it's too late.

Retirement planning: your 50s

Once you reach your 50s, retirement suddenly starts to feel like a real possibility. But just because you're near the finish line doesn't mean you can start coasting -- quite the opposite, in fact. You should start saving more, and the IRS is happy to help you do it: Once you reach age 50, you can contribute an additional $6,500 to your 401(k) each year and an extra $1,000 to your IRA, so if you can max out either or both accounts, then go for it.

In fact, if you're coming into your 50s with no retirement savings to show for, you'll probably need to max out your IRA and/or your 401(k) to have a shot at a secure retirement. If you manage to sock away $6,500 a year for 12 years, you'll end up with about $116,000 if your investments deliver a 7% average annual return. That's not a whole lot to work with over the course of retirement, but it's far better than nothing. On the other hand, if you have a 401(k) that you max out for 12 years, you'll end up with $438,000 (assuming that same 7% return), which paints a much better picture.

Retirement savings aside, there are some other critical moves you should make during your 50s to prepare for your golden years. First, start making extra mortgage payments so that your home loan is on track to be paid off by the time you retire. Similarly, avoid taking on any sort of additional debt in your name, including the educational variety. Noble as it is to spare your children the burden of paying for college, remember that they have their whole careers ahead of them to knock out student loans, whereas you don't. Ideally, you won't carry any sort of debt into retirement, because if you do, it'll probably eat up an uncomfortable portion of your limited income.

Another key step to take in your 50s is to purchase long-term care insurance. It's estimated that 70% of seniors aged 65 and up will need some form of long-term care in their lifetime, and if you don't have a policy in place to help defray those astronomical costs, they could bankrupt you later in life. Your 50s are a good time to apply for coverage, because at that age, you're more likely not only to get approved, but to snag a long-term discount on your insurance premiums based on your present health.

Finally, you should start shifting some of your investments out of stocks and into safer vehicles such as bonds. You should, however, still invest as aggressively as you can without losing sleep. If you're in your early 50s, you can get away with keeping 65% to 70% of your portfolio in stocks, but by your late 50s, you may want to ratchet that down to 60% -- especially if you're planning to retire in your early to mid-60s.

Retirement planning: your 60s

Once you hit your 60s, retirement will be here before you know it, so the best thing you can do is assess your current financial situation and make any last-minute adjustments that may be necessary. You can start by mapping out a retirement budget and seeing how well your savings are able to support it. If you're short, you might consider working longer and adding extra funds to your nest egg.

Maxing out a 401(k) for just three years, for example, will give you an additional $77,000 to work with, assuming your investments generate a relatively conservative 5% return during that period. Furthermore, the longer you work, the longer you avoid dipping into your nest egg, thus increasing its likelihood of lasting throughout retirement.

As far as your investments go, resist the urge to dump your stocks in your 60s. At this point, you should still have roughly half of your portfolio in stocks, if not a little more, so that your investments continue to generate growth in retirement.

Another important step to take in your 60s is developing a smart Social Security filing strategy. You're eligible to collect the full monthly benefit your earnings history entitles you to once you reach full retirement age, which, for today's workers, is either 66, 67, or somewhere in between. You can file for benefits as early as age 62, but doing so will reduce them substantially. On the flip side, you can wait until age 70 to file for benefits, and if you do, you'll snag an 8% benefit boost for each year you wait.

The age at which you choose to claim Social Security will depend on a number of factors. If your nest egg isn't all that robust and you believe you'll come to rely on those benefits as a major income source in retirement, then it generally pays to wait until full retirement age or beyond to file. On the other hand, if your health isn't great, it typically makes sense to file sooner. That's because Social Security is designed to pay you the same total lifetime benefits regardless of when you initially file, but only if you live an average lifespan. The logic is that whatever reduction in benefits you face by filing early is offset by the larger number of payments you collect in your lifetime, and vice versa; filing late will increase your benefits, but you'll collect fewer payments. If you pass away earlier than the average senior, however, you could end up with less money by delaying benefits.

If you're married, you and your spouse should work together to devise a filing strategy that works for both of you. You might, for example, have the higher earner among you hold off on benefits until 70, thereby increasing those monthly payments for life, while the lower earner files sooner and gives you money to work with. There are a number of combinations you can play around with, so take each other's goals and needs into account.

Another important step is to read up on Medicare and find out what it will and won't cover. Then you can look into whether you need supplemental insurance or a Medicare Advantage plan to cover your unique healthcare expenses. Keep in mind that Medicare eligibility kicks in at age 65, which is a year or two before full retirement age for Social Security purposes, depending on your year of birth. You don't have to enroll in Medicare at 65 if you're already receiving coverage through a group plan at work, but if that isn't the case, you should sign up on time to avoid penalties.

Finally, be sure to map out a plan for how you'll spend your time in retirement. Going from a full-time work schedule to a complete lack of structure can throw you for a loop, so don't go into retirement blind. Figure out what you'll do with your days and what that will cost you. You may decide to start your own business as your primary career winds down and then carry that venture into retirement with you. Doing so will not only give you something to occupy your days with, but also serve as a means of generating income.

Keeping your eyes on the prize

No matter what decade of life you're in at present, it always pays to think about retirement. The moves you make today could spell the difference between enjoying your golden years and struggling to scrape by as a senior, and that should play a role in your financial decisions regardless of how old you are.