Some people consider their 30s to be their prime earning years. So, there’s no surprise to learn that building your nest egg in your 30s is the perfect time to start. Saving earlier in life provides better options later on and puts you in a great position when you retire. Here’s how to plan for retirement in your 30s.
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How to Plan for Retirement in Your 30s and Be Financially Happy
In your 30s, you’re likely to pick up more responsibilities, like buying your own home or growing your family. Marriage, mortgage, and family expenses will all eat a portion of your paycheck, so it might seem an impossible feat to save for retirement at this time of life. But it should remain a top priority – the more you save and the earlier you start, the more potential your savings have to grow.
Pay Off Any Debt
Before putting any money aside into savings, you should pay off any outstanding debts. That said, a mortgage or car loan is an acceptable low interest-rate debt that can be managed alongside a savings plan. Paying off debt is important, but building financial resilience is also key to any fiscal plan. Ensure all toxic debts are cleared, like payday loans and high-interest credit cards; otherwise, your budget can get eaten up by interest payments.
Build an Emergency Fund
Nearly all financial advisors will agree that an emergency fund is an essential financial insurance policy needed to cover life’s surprises. Usually, this should be at least three months’ worth of regular income, but ideally, six months, set aside in an accessible savings account. Combined with sticking to an emergency budget, this should be enough money to ride out things like short-term illness or job loss.
However, after the onset of the global pandemic, many people have become more financially astute, so having up to a year’s worth of income is excellent protection. It will mean you shouldn’t ever need to dip into your longer-term savings.
Building an emergency fund before investing long term will protect you against the stresses of unexpected financial situations and unforeseen expenses.
Consider Other Expenses
In your 30s, you will also need to save for other things, like the kids’ college fund, vacations, or a down payment on a house. Retirement planning should come first, but money can also be diverted to these other goals by stashing away windfalls and saving when you get a raise or bonus. Prioritizing how you spend your income will maximize how much you can set aside.
If you feel determined to save more for retirement but think you don’t have enough extra income to set money aside after your paycheck, look to cut out non-essential expenses. You’ll be surprised at how much you spend on luxury items once you start making a list. Obvious costs will be things like trips to the theatre or take away food, but you can also check out what you spend on groceries each month and cut out expensive, high-end items. Look for cheaper alternatives, or at making products from scratch.
Consider canceling any subscriptions or memberships like gym, Netflix, cable, etc. If that seems too much, look to get better deals by switching providers or downgrade instead.
These are just examples, but there might be other expenses that you can reduce without sacrificing your lifestyle too much.
Start With a 401(k)
Most people should start saving for retirement by setting up a 401(k) as young as possible, but it’s certainly not too late to start in your 30s.
Contributions get taken directly from your paycheck, before taxes, so once set up through your employer, a 401(k) is extremely easy to manage. Most employees will match your payments, which is virtually free money that you won’t find through other plans.
Use a 401(k) calculator to see how much you can save for retirement – if you start saving at age 30, $1 million by the age of 67 is entirely achievable (based on a salary of $50,000).
Supplement Retirement Income with an IRA
Possibly the second-best place for your retirement savings is an individual retirement account like an IRA or a Roth IRA. These accounts should be your first choice if you don’t qualify for a 401(k).
A bank or broker will open an IRA for you and explain the various types and conditions.
You can make contributions to a Roth IRA after paying tax, which means you won’t get taxed in retirement when you draw on your fund. This also means your savings pot grows tax-free, and if you can make maximum contributions, your earnings can exceed your annual contributions because of compounding interest.
If you prefer to pay tax later, consider a traditional IRA, which means you can apply to the IRS for a tax deduction on the amount you save. However, when you withdraw funds in retirement, you will be taxed as per your income rate.
You can only save a maximum of $6,000 each year (2020 limits) before it’s maxed out, but if you start to save at age 30, that almost $800,000 if you retire at age 67.
Seek support from a qualified financial advisor who will be able to guide you on how to plan for retirement in your 30s. They can also advise you on the best way to protect your finances, such as life insurance or disability insurance.
Has this guide on “How to Plan for Retirement in Your 30s” been helpful? Have you any other advice for our readers? Let us know in the comments section below.