As people move into their 30′s, life often becomes more complicated. Getting married, starting a family, buying a house; these are just a few of the life events that often occur in one’s 30′s, and this makes it even tougher to prioritize saving for retirement.
While most of the advice we gave in our article “7 retirement tips for people in their 20′s” is still relevant, here are a few additional retirement tips for when you hit 30.
Make it a priority
While the 30′s is often a time of rapidly rising income, it’s also a time of even more rapidly rising expenses for most people. New houses need to be furnished, babies need to be clothed and fed, mortgage payments come around monthly. With so many competing priorities, it is easy to say that retirement is still very far away and can wait. This is a mistake.
One assumption that’s built into this viewpoint is that savings will become easier later. For most people, there will always be other priorities competing with our retirement savings aspirations. Helping elderly parents, a bigger house, a new car. In our consumption driven economy, there is always something we want and / or feel we need to have now. In addition, the penalty for waiting to save is large. By starting to save at 40 for retirement instead of 30, you will need to double your monthly savings to get to the same dollar figure by the time you hit 65.
Track your expenses
To help you find opportunities for savings, it’s a great idea to track your expenses more closely and see where your money really goes. Programs like Quicken and sites like mint.com make this very easy to do. By the time you’re 30, you likely have a better handle on what is really a necessity versus a luxury that could turn in to savings. Will you really wear that $200 sweater frequently or will it sit in the closet gather dust after a few uses? Just how much money are you spending on your Starbucks habit? Do you really still watch all the premium channels you pay for on your cable bill? Looking at a few months of expenses in detail can often uncover significant sources of potential savings that won’t really impact your current lifestyle.
Make sure you protect yourself from the unexpected
One of the quickest ways to derail a retirement plan is to have an unexpected financial event. Ranging from a short-term disability to the death of a breadwinner, without adequate protection, even the best laid plans can be devastated. Here are a few of the most common events and how to best prepare for them
- Unexpected job loss – By the time you are in your 30′s, you should create an emergency fund that covers 3-6 months of expenses. Having this cushion allows you time to find a new job without raiding your retirement savings or taking on high interest debt.
- Short-term disability – Similar to a job loss, a short-term disability has the potential to interrupt your income and create havoc with your budget. The good news is that many employers provide short-term disability insurance. If you don’t have access to this, you can investigate buying a private policy or you can simple rely on your emergency fund to carry you through.
- Long-term disability – This has the potential to permanently impact your income stream. Many companies offer insurance, but if yours doesn’t, you should investigate private insurance options
- Death of a breadwinner – Obviously the most devastating of possible outcomes. If you are married and /or have kids, you should make sure you have adequate life insurance to cover your family’s expenses. Due to its low cost, I recommend looking for a term policy with level premiums until your kids are out of the house. I do not recommend high-cost whole or universal life.
Put your retirement ahead of your kids college
If you become a parent, you will find it very difficult to put your needs ahead of your children. However, this is a circumstance where you should. Between work/study, scholarships and loans, there are many ways to fund college. Unfortunately, no one is going to loan you money for retirement.
In an ideal world, you will find enough money to save for both. However, if you are forced to make a trade-off, fund your retirement first.
Don’t be afraid of stocks
With two 50%+ drops in the stock market in the past 15 years, it is understandable that younger people are nervous about putting their money in stocks. What you need to realize though is that time is on your side and “safer” alternatives aren’t really so safe. For more on this latter point, check out “The fallacy of safe investing“.
The bottom line is over the long run stocks almost double the return of bonds and have never lost money over a 30 year window (or even a 15 year window for that matter). To hit your retirement goals, you need your investments to outpace inflation and stocks are the best game in town to do that.
Don’t overload on your company’s stock
Investing in your 401K is great. So is working for a company that gives your stock options or discounted stock purchase plans. Just make sure you don’t end up with too many of your assets in your company’s stock. As your portfolio grows, it’s important that you diversify, and one aspect of that diversification is ensuring you don’t have more than 5% of your assets in any one company.
You are already counting on your employer for your income, so if something happens, it’s a double whammy if you own too much of the company’s stock. Just ask former Enron employees. Many of them had their entire 401K in Enron stock. When the company collapsed, they not only lost their jobs but their entire savings as well.
Don’t cash out your 401k when you change jobs
When changing jobs, it can be tempting to cash out your 401k and spend it. Don’t. In addition to having to pay taxes on the balance, you’ll add a 10% penalty for early withdrawal if you aren’t 59 1/2. Roll it over into an IRA and invest the money in a diversified portfolio of ETFs or mutual funds according to your desired asset allocation.
The 30′s is an exciting time in most people’s lives. It also a great time to build solid financial habits. Follow these 7 retirement tips and don’t get distracted by all the competing priorities. You’ll be glad you did!