The thought of retirement in your 30s can seem unnecessary. Getting old and hitting age 65 is at least 26 and at most 35 years away (depending on who you are) and that seems like a long time to be able to save money. On the other hand, it can lead to intense anxiety because that’s only about three decades and you need to save money that will potentially need to last you 30 years. Fortunately, it truly is never too early to start thinking about retirement and putting away money. I’ve included five tips that will help you plan for retirement while in your 30s.
Contribute to Your 401(k)
If your employer offers a 401(k), take advantage of this important investment strategy. The IRS allows you to contribute up to $19,500 in your 401(k) in 2021. While this might not feel like a significant portion to contribute, this is nearly 20% of your income if you make $100,000 a year. You can essentially put as much as you’re comfortable with each year in order to maximize your financial benefit when you reach retirement age.
In addition to your contributions, you should be aware of how much your employer is willing to match. Employer 401(k) match programs are designed to help reduce turnover within the company and keep you around for the long term. You likely have to be vested over the course of a specific amount of years in order to receive the benefit, but it’s worth looking into either way. Either way, you should take advantage of an employer match program as that’s free money contributed to your retirement fund.
For example, if your employer contributes a 3% match and you’re contributing 5% of your annual income, you’re then getting 8% of your income contributed to your 401(k). With a salary at $100,000 per year, you’re getting $8,000 put into your 401(k), but only $5,000 of it comes out of your pocket.
Save, Save, Save
Saving money isn’t easy. If it was, we would all do it and do it well. There are things we want and places we want to go that call to our wallets and touch our weaknesses. But, even if it’s not a habit that you’ve already created, you can get started. Like anything else, you can create the habit by starting small. Tuck away $5 to $10 every time you get paid. This is a small and easy amount to start with, but it will still add up over the course of a year. You’ll see your savings grow over time as even $10 a week is $520 in a year.
Like most healthy habits like working out or eating right, you’ll catch the bug. Passing up the first few purchases will be hard. You’re probably going to want to buy some new clothes or upgrade your phone since you have the cash readily available but be strong and resist the urge. As you watch your savings grow and learn to resist the urge to spend, it will get much easier. Consider your savings off-limits as you play the long game. You’ll also feel increasingly comfortable putting more money toward savings as it’s available.
Pay Down Your Mortgage
Another way that you can plan for retirement is by paying down your mortgage as much as possible. This will help you to maximize your equity in your home by minimizing what you have remaining when retirement rolls around or even having the entire thing paid off. Having a small balance remaining on your mortgage provides several benefits like being able to take out a reverse mortgage or put down a larger down payment should you decide to move.
While you obviously don’t need to make final decisions on where your money is going to come from in retirement, it’s good to know your options. Should you find yourself in a pinch and feel that you want to pad your nest egg, a reverse mortgage is a good option. If you’re unfamiliar with a reverse mortgage or how it works, let me briefly explain. In a traditional mortgage, you borrow money from a lender to pay for your home. You then make monthly payments toward that loan until it’s paid off. In a reverse mortgage, you borrow money from a lender against the equity of your home. You receive that money in a lump sum one-time payment or as monthly installments. Repayment for this loan is not due until either your or your heirs sell the home.
While this option might be new to you, it’s been available for more than 30 years and aiding those approaching retirement in padding their nest egg. According to All Reverse Mortgage, “… the reverse mortgage program has helped thousands of homeowners just like you to safely access a portion of the equity in their homes to better enjoy their retirement years.”
If you think you might want to downsize your home or relocate to a new area entirely, a reverse mortgage isn’t right for you. Instead, you can take the profits you get from selling your home and put it toward the purchase of a new home. By capitalizing on the equity, you’ve built in your home, you have the opportunity to put down a large down payment on a smaller home to live more comfortably. This is always a good idea during retirement because you’re not likely to be able to live off the same annual income that you’ve come accustomed to. Cutting your cost of living will help your retirement fund stretch when you need it to.
Open an IRA
If you don’t work for a company that offers a 401(k) or you’re self-employed, an IRA is an excellent option for building your retirement fund. An IRA is an individual retirement account. You can open an IRA with your financial institution and contribute as you see fit. However, the part of opening an IRA that can be tricky is finding the right one for you and your financial plan because there are seven different types of IRA that include:
Each IRA is unique in its own way and provides the owner with individual benefits. Let’s do a brief comparison of the three most frequently used IRA accounts in the traditional, Roth, and SEP IRAs. (Note: contribution limits are based on 2021 limits established by the IRS.)
The Traditional IRA was the original of the seven and is still the most commonly used of the group. Your yearly maximum allowable contribution to your traditional IRA is $6,000, but you’re allowed to put in an extra $1,000 each year if you’re over the age of 50. This is called a “catch-up contribution.” As long as your money remains in the account, your contributions will not be taxed, but they are at the time of withdrawal, which can begin without penalty at age 59 and a half. This account is recommended for those who believe that they’ll drop into a lower tax bracket during retirement.
Typically when paying into a retirement account, your contributions are tax-free. This is why you’ll find limits on contributions. This is not the case with a Roth IRA. However, you benefit from this as your withdrawals are tax-free. Similar to a traditional IRA, you can contribute up to $6,000 yearly to your Roth as well as your $1,000 catch-up contributions once you turn 50. In stark contrast to a traditional IRA, you can withdraw from your Roth at any time without penalty. This means that you can retire at 50 years old if you’re able, then make tax-free withdrawals from your Roth IRA.
A SEP IRA is unique from the others as SEP stands for simplified employee pension. This is more similar to the traditional IRA than the Roth with its tax benefits and withdrawal penalties. Although, it’s set up by an employer who will then get tax benefits by contributing to it for you. A SEP IRA also comes with an incredible contribution limit of up to 25% of your yearly income or $58,000, whichever is less. A SEP IRA is not eligible for catch-up contributions.
While this seems like it’s much more beneficial to employees than even a 401(k), rules state that in order to be eligible, individuals must have worked for an employer for at least three of the last five years and made at least $600 a year during that time. This is a great solution for small business owners and sole proprietors as they’re eligible to open a SEP IRA for themselves.
Speak With a Financial Advisor
If you’re concerned about being able to save for retirement, speak with a financial advisor. An expert in financial planning can help you put together a budget and build a road map to where you want to be financially when you retire. They’ll take into account things that you think you might want to do, places you want to go, and how much you want to live off each year during your retirement. Even if you’ve been planning for retirement since you were 20 years old, a financial advisor is a great resource to help you keep the same trajectory to reach your goals for retirement.