To be sure, establishing a home and family is expensive, and it’s easy for retirement to seem like an impossible goal for individuals in their 30s.
“You can’t always do it all,” says Dick Bellmer, past chairman of the National Association of Personal Financial Advisors.
So breathe easy. You won’t have to reach all of your goals at once. But, retirement should remain your top priority. That means you’ll need to work hard to balance spending with saving. Here’s how:
Ideally, you’ll want to make the maximum annual contribution limits into an employer-sponsored fund, such as a 401(k). For 2017, that’s $18,000. As you move up the career ladder, put raises into your retirement savings, don’t spend them. If you can’t afford to stash all of your pay increases into retirement funds, gradually increase contributions over time, says Dee Lee, CFP professional and author of “Women & Money.”
“Let’s say you’ve got 3 percent in your 401(k) to qualify for the company match. Add a bit more. Then maybe add another percent of your salary a few months later, so eventually you’re saving 10 to 15 percent of your income,” says Lee. “You won’t miss the money if you increase saving slowly.”
You’d be surprised the difference that even an incremental, 1 percent increase can make in the long run. For example, a 30-year-old who saves 6 percent of a $50,000 salary, or $3,000 a year, will have nearly $840,000 banked by the time she has to start taking funds from her 401(k) at age 70 1/2. (This assumes an 8 percent annual growth rate.) If she boosted her yearly contribution by just $500 she’d have nearly $980,000. That’s a difference of nearly $140,000.
If you’re already putting as much as you can into a 401(k) or other employer-sponsored fund, pat yourself on the back, then open a separate, personal IRA. This year, individuals under age 50 can save up to $5,500 in a Roth IRA, a deductible IRA and a nondeductible IRA, subject to income limits.
Which one’s best for you? Ed Slott, author of “Your Complete Retirement Planning Road Map,” believes that everybody should open a Roth if they can. That’s because you save with after-tax dollars, but the earnings on your investments grow tax-free forever. Plus, unlike many other retirement plans, you never have to cash out a Roth. Earnings can grow as long as you want.
Now for some fine print: You’ll have to meet certain income requirements to open a Roth IRA, says Slott. For single taxpayers, eligibility starts phasing out when your income tops $118,000 in 2017. For married couples filing a joint tax return, the phaseout begins at $186,000.
If you currently don’t qualify, look at the deductible IRA. It has no income requirements as long as you’re not enrolled in an employer-sponsored retirement plan. You get a deduction for your contribution and earnings grow tax-deferred, which means you pay income taxes when they’re cashed out. A nondeductible IRA lets earnings grow tax-deferred, too, and it’s open to anyone.
It’s not just enough to save. You also need to keep an eye on existing retirement assets to ensure you’re not squandering opportunities for growth.
Someone in his 30s needs to invest aggressively, allocating up to 80 percent or even 90 percent of assets to a diverse array of stocks, says Ellen Rinaldi, former executive director of investment planning and research at Vanguard, now the firm’s chief security officer.
Don’t fall into the trap of saving then forgetting about your assets. That includes paying attention to company stock.
If your shares in the company have done well, they may now make up a big chunk of your retirement plan.
Financial planners generally agree that company stock, or any other single equity for that matter, should never exceed 10 percent of your portfolio. More than that and you put your retirement at great risk. “Your savings shouldn’t be determined by the health of a single company,” says Rinaldi.
If you’ve been changing jobs, or are seeking possibilities elsewhere, don’t let your retirement fund take a hit. Too often, a rich opportunity has the effect of unsettling savings amassed to date. Most frequently, this happens when individuals opt to cash out a 401(k) instead of leaving it intact.
Problem is, if you do cash out before age 59 1/2 you’ll almost always owe a 10 percent penalty on top of immediately having to pay income taxes on the withdrawal, which could be end up being as high as 35 percent — the highest current bracket. A smarter move is rolling over the 401(k) into an IRA, which you can then invest any way you want.
Bad timing is another pricey trap. That’s because most employer retirement benefits make you work a period of time before you become eligible for full benefits — known as “vesting.” For example, with a 401(k), you may be able to keep 20 percent of an employer’s contributions after a year, but you’ll have to work another year to get an additional 20 percent and so on until you are fully vested. Pensions are structured a bit differently, with benefits usually becoming available after five years of service.
The bottom line: If you’re about to pass a vesting milestone that will enable you to keep more, or all, of your employer’s retirement fund contributions and pension benefits, it may be well worth it to wait before you leave for greener pastures. Ditto for quitting to care for children.
Now it’s time to focus on other expenses. Those with little babies, take note: It’s never too early to think about college. Bear in mind, though, that financial advisers strongly advise that retirement savings should be your first priority.
“I see people who, early on in their careers, shorted themselves on retirement savings because they were planing for a child’s college instead,” says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. “But when you go to college, there are work-study programs, grants, loans. There are scholarships. There are no plans like this to help with retirement. I’m not saying forget about college, but don’t neglect retirement, either.”
If you are determined to help your kid pay for Harvard, start early. Like any other big-ticket expense, it’s easier to save a little bit over the long haul than trying to play catch-up when your kids are in high school.
The good news is that there are plenty of tax-advantaged programs designed to help families maximize their education savings. A state-sponsored 529 plan allows earnings to grow and be withdrawn tax-free if the money is spent on bona fide education expenses. What’s more, your state may let you claim a deduction for making deposits.
Finally, safeguard your financial future. If you’re hurt or injured and can’t work, disability insurance will replace up to 60 percent of lost income, but only for a period of time. Most employers offer short-term benefits up to a couple of months. But about half of all medium- to large-sized companies provide long-term benefits of up to five years, and sometimes even for your lifetime, according to America’s Health Insurance Plans, an industry group. Check to make sure you’re covered. If not, and you can afford to, consider buying disability insurance on your own.
It’s a similar story for life insurance. Many employers offer it. But if you’re out of a job, you lose coverage. If you are short on cash, pick a term life insurance policy, which will get the most coverage for the least amount possible and allow you to lock in low, level annual rates over the long haul.