There are certain financial moves that we focus on making during every stage of our lives. Retirement Planning He is one of them.
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While the general suggestion is to start planning for retirement as soon as possible, this old adage is just as important: “What’s the best time to plant an apple tree? 50 years ago. What’s the second best time? Today.”
There’s no right or wrong time to start advance retirement planning, but it doesn’t hurt to start early as long as you have an understanding of your plans.
Dr. Rui YaoHolds a Ph.D. and CFP from the University of Missouri, GOBankingRates Scholarships Suggestions on how people in their 30s and 40s can start planning for retirement.
The 1930s: Paying Off Debt, Saving, and Planning a Lifestyle
Most people in their 30s have completed their formal education and are in the process of creating jobs. Yao said debt management is important during this decade. People will want to prioritize paying off any debts they have accumulated – for example, student loans and credit cards. Doing so will help contribute to a good credit history and the associated lower cost of borrowing, as well as reduce future debt burdens.
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Yao recommends opening an Individual Retirement Account (IRA), whether it’s a traditional account or a Roth IRA, and maximizing contributions.
“The Roth IRA provides some back-end liquidity to young individuals, and it should be considered a top priority,” Yao said.
Those who work for employers who sponsor defined contribution retirement plans, such as 401(k) plans, are advised to save to the level at which the employer match stops.
As individuals begin to lay the groundwork for their retirement, many of them move on to the next chapters of their lives. These classes feature milestones such as saving for homes, getting married, and raising children. In the current turbulent economic climate, the 1930s is the time to protect these and other life events through an emergency fund.
“Depending on job security, the level of the emergency fund should be cash and equal to six months of basic expenses or more,” Yao said.
40s: planning, saving, risk management and budgeting
Saving for retirement becomes even more important once people start aging in their 40s. Income must continue to increase and assets must accumulate. It is time to start getting involved in risk management planning for long-term goals.
What does this mean? Yao recommends reviewing insurance policies wisely, including property insurance, health insurance, disability insurance and life insurance.
In addition to risk management planning, individuals in their 40s need to take income tax planning and estate planning into account. Those who have established families in their 30s will need to carefully plan how to care for the children in the event of an unforeseen circumstance and also consider the beneficiaries.
As with any decade, it’s possible for people in their forties to experience career changes. In contrast to younger decades when people didn’t have to worry so much about what happened between job hopping, Yao said people should remember to bridge the inevitable shifts in benefits.
“Don’t spend money and retirement savings from a previous job,” Yao said. “Instead, consider transferring the balance to your new retirement plan, if your new employer allows it, or transferring it to an IRA. Small amounts can accumulate to a large level of resources over a long period of time.”
People in their forties should also be careful not to let lifestyle intrusions take over. This may manifest in the form of buying a luxury car or an expensive new home. As much as possible, people should control their expenses, exercise discipline, and continue to keep track of their budgets. They should also put their savings into retirement regularly.
Yao said, “Portfolio allocation based on risk tolerance and investment horizon is of particular importance during this stage.”
The financial advice suggested above is of a general nature and is not intended for any person in particular. Some may find that they start taking retirement planning steps before their 30s, decide that the next chapter in their lifestyle is better to spend one semester or that paying off student debt takes a few years longer than expected. That’s fine, as long as they make decisions that benefit their financial health and future.
“Each life stage brings with it some common characteristics, such as your 30s and 40s,” Yao said. “Keep in mind that while there are some commonalities, everyone is different, and these differences are important in making financial decisions.”
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This article originally appeared GOBankingRates.com: Critical steps in planning for retirement in your 30s and 40s
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