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Impromptu trips to visit grandkids, adventures to must-see landmarks, and family celebrations hosted at your paid-for home. That’s the kind of retirement many Americans dream about.
You don’t have to earn six figures to turn this dream into a reality. But you do have to live and plan today with that goal in mind.
Building wealth starts with proper planning at every stage of your life. Here’s a decade-by-decade look at what you can do to maximize your savings potential.
How to Build Wealth in Your 20s
You’re a Millennial. What does retirement have to do with you? A lot, actually. Because you have the most to gain when it comes to retirement. There should be no stopping you when it comes to building wealth because you have the one thing other generations don’t: time.
Jesse Haller, certified financial planner and vice president of Compass Financial Group, in Sioux Falls, South Dakota, encourages young adults to use their 20s to create a solid foundation for the future.
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“Everything you do with your money could have lasting consequences for good or for bad starting in your 20s,” Jesse said.
Tame wild spending habits, stay away from debt, and learn to budget your regular paychecks wisely, he suggested.
“Once you start working, don’t feel like you need to buy a new car, take that trip to Cancun, and do all the things you see others doing,” he said. “You’ll rack up credit card debt that could take a decade to pay off because you spent money you didn’t have.”
Here’s a scenario: Let’s say you begin investing $200 a month at age 24. But your friends who bought their new cars and took their dream vacations on credit end up delaying saving for retirement until age 34 while they pay off their debt. At age 64, you’d have almost $1.2 million in retirement savings. However, your spendthrift friends would only have $424,200. You’d be ahead by $775,800!
Want to build wealth beginning in your 20s? Here’s how:
- Steer clear of debt. If you have debt, slash it as fast as you can—student loans, included. If Sallie Mae is living in your spare bedroom, kick her out ASAP.
- Live below your means. Just say no to things you can’t buy with cash! Overspending every month can dramatically impact your ability to save for retirement.
- Raise your standard of living slowly. This is not the time to grow leaps and bounds in houses or cars. Paid-for clunkers and small apartment rentals will do just fine while you secure your financial footing.
- If you’re married, get on the same page about money. This is one of the most important steps you can take to build wealth.
- Budget like your retirement depends on it—because it does. A monthly written budget assigns every dollar a specific purpose, like food, clothing, housing, bills and savings. A budget ensures you’ll have the money for the things that are important to you, like fun money and retirement savings.
- Start early. As you can see in our example above, it doesn’t take a lot of money to build a million-dollar retirement—as long as you start early! Start by investing just $200 a month, then add to that amount as your income grows over the years. That’s a wealth-building habit that will pay off not just in dollars, but in new opportunities for you down the road.
“Gain wisdom and truth when it comes to financial management,” Jesse added. “You’re in charge of your own future. Learn all you can about staying intentional with your money now, and the rest of your working career.”
How to Build Wealth in Your 30s
For folks in their 30s, life is in full swing. You might have a few kids, a mortgage, and monthly expenses that seem to always consume your income. Saving for retirement could easily take a back seat to everyday living expenses. But don’t let that happen!
“Save first,” Jesse said. “Expenses will always rise to meet income. It doesn’t matter if you make $50,000 a year or $250,000 a year, you’ll need to make a plan or else the money will seem to just disappear.”
Life never gets less expensive, and saving never gets any easier from here on. Commit to carve out the money and stick with it, he said.
If you’re a thirtysomething, consider these wise moves:
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- Watch your housing budget. If you’re unable to pay cash for your house, remember to spend no more than 25% of your monthly take-home pay on a 15-year fixed-rate mortgage. Don’t make the mistake of becoming house poor, especially at the expense of not being able to save for retirement.
- Have your emergency fund securely in place. You need three to six months of household expenses saved for an unexpected emergency. Having adequate savings on hand keeps you from dipping into your retirement fund or going back into debt when an emergency happens.
- Max out your retirement savings options. If your employer offers a 401(k) match, contribute up to the match, and then fully fund a Roth IRA. Your goal is to save 15% of your household income for retirement.
- Save for retirement before your kids’ college. Your kids may or may not go to college, but you have a high probability of retiring if you live long enough. So, make saving for retirement a priority over saving for college if you can’t afford to do both.
Related: Learn more about retirement. Check out Chris Hogan’s Retired Inspired Podcast!
How to Build Wealth in Your 40s
The Economic Policy Institute (EPI) recently reported that the average retirement savings of folks between the ages of 44 and 49 is $81,347. That’s not going to cut it. Realistically, you’ll likely need enough savings to replace 80% or more of your pre-retirement earnings to maintain your lifestyle throughout your golden years.
If you’re not where you should be with your retirement savings, you’re not alone. Many Americans are in the same boat. Get on the right path and conduct a serious retirement-readiness audit. Here are three ways to get on the right financial path:
- Know your portfolio. Meet with a financial professional and make sure you’re investing the recommended 15% of your annual income in tax-advantaged retirement accounts like a 401(k) or Roth IRA. Automate your contributions if you’re not already doing so. Each time you get a raise, add it to your retirement savings.
- Don’t borrow money from your retirement account. Find other ways to pay for unexpected medical bills, home improvements and college expenses. If you borrow from your 401(k), you’ll have to halt contributions until you pay back all the money.
- If you have a mortgage, start paying it down. If you have a $250,000 balance on a 15-year fixed-rate mortgage with a 4% interest rate and could pay $300 extra each month, you’d pay off your home two and a half years early. The goal is to create a mortgage-free retirement as soon as you can, and boost your retirement savings to make up for lost time.
How to Build Wealth in Your 50s
According to a recent Ramsey Solutions Research study, 53% of working Baby Boomers who aren’t currently saving for retirement have no plans to save. But this is the time for them to take advantage of the retirement savings opportunities that come with age. If they don’t, these Baby Boomers will face a financial crisis in retirement. So, if you find yourself in your 50s with little or no savings, this is the time to play some serious catch-up.
Some options include:
- Annual catch-up contributions. Folks age 50 and older can invest an additional $1,000 in their Roth IRA, for a total of $6,500 each year. You can also invest up to $24,000 in your company’s 401(k) plan.
- Wait to withdraw your Social Security. You can claim retirement benefits as early as age 62, or as late as 70. Delaying your claim will increase your monthly benefits. If you can wait until your full-retirement age, you’ll receive more money each month.
- Health insurance. The likelihood of needing medical care increases with age, so be sure to keep at least basic medical insurance coverage at all times. One major health crisis could set you back financially and delay your ability to invest more for retirement.
“Your 50s are typically your peak earning years, and your expenses are the lowest they’re going to be before retirement,” Jesse pointed out. “You should have more clarity about where your money is going, and now you should sprint to the finish.”
Where Do I Go From Here?
“Retirement is going to come whether you’re prepared for it or not,” Jesse said. “You can arrive there on your terms, or you can be unprepared—which will force you to make hard decisions about money in your golden years. Remember, it’s not easy for anyone. That’s why it’s important to have principles and truths in your life that you can hold on to so you know you’re doing the right thing even if it isn’t easy.”
Start today and reach out to a financial advisor, if you haven’t done that yet. A qualified professional will help you create a plan that’ll set you up for success for decades to come. Need help finding an advisor in your area? Contact a SmartVestor Pro today!