Financial Planning Keys for Each Decade of Adulthood: 20s, 30s, 40s, 50s, 60s, & 70+

 

Needs, priorities, aspirations and personal circumstances change over time. But one of the constants amid all this flux, regardless of a person’s age or stage of life, is money — ensuring they have the financial means to get where they want to go in life.

 

Each decade of life presents a unique set of demands and dynamics that dictate how a person handles their finances. A single, childless person in their mid-twenties likely has a much different outlook on money than a 40-something parent of three, or a 70-year-old recent retiree, does. But as much as financial mindsets and circumstances vary from individual to individual and from age group to age group, each decade of life comes with a distinct set of fundamental financial keys that, if followed, should put a person in position to roll with the changes, meet their needs and fulfill their aspirations, for as long as life happens to last.

 

Here the personal finance experts at the Financial Planning Association share their financial keys for each decade of life, from the twenties, right through retirement age.

 

20s

 

• Start saving toward retirement. Sure, it’s decades away, but thanks to the power of compounded growth over time, 20-somethings who start stashing money in a retirement account, such as a workplace 401(k) and/or some type of IRA (traditional and/or Roth) tend to end up much better positioned financially for retirement than their counterparts who wait until their 30s or 40s to start saving, according to Michael Cooper, a New York City-based Certified Financial Planner™. Committing to set aside even a modest amount each month — preferably by automatic withdrawal to take the guesswork out of it — can translate to tens of thousands of dollars in additional retirement savings later.

 

• Fund a Roth IRA. Contributions to a Roth IRA are taxed on the way in, not the way out, which from a tax perspective serves as a good complement to qualified retirement plans such as 401(k)s, where the money coming out typically is taxed as ordinary income. Contributing to a Roth while in your 20s also makes sense because the tax rate applied to those contributions will tend to be lower when your income is lower.

 

• Develop a budget/spending plan. Getting a clear picture now of what you have coming in compared to what you spend allows you to organize your financial life, identify areas where you may be spending frivolously, and prioritize how you allocate your dollars going forward. Want to pay down a college loan more aggressively? With a budget or spending plan, you can identify areas where you can reallocate dollars (discretionary spending, such as eating out) to meet that goal.

 

• Get a handle on debt. Many 20-somethings find themselves carrying a heavy student loan burden, and, perhaps for the first time, a credit card balance or two. It’s crucial for them to take steps to manage and minimize that debt by paying off credit card balances promptly and preferably in full each month, to prevent interest charges from mounting. It’s also important to make a plan for paying down any school loans.

 

• Familiarize yourself with how the financial markets work. This hopefully leads to better informed decisions about investments and retirement accounts.

 

• Start saving toward bigger goals by committing to set aside money each month in some type of savings vehicle (such as a CD or higher-yield savings account) for purchases such as a home or a wedding, or for a future child’s college education.

 

30s

 

• If you have children, start saving in earnest for their college education in a tax-favored account such as a 529 college plan (most states offer them, in tandem with significant tax breaks on contributions).

 

• Invest in a home. Not only do you get a roof over your head that’s all your own, you get an asset whose value is likely to appreciate steadily over time. The interest paid on a home also may be a tax write-off.

 

• Escalate contributions to your retirement accounts, with the goal of contributing the maximum amount allowed by tax rules. If your employer has a program to match retirement plan contributions, do your best to take advantage of it.

 

• Get a handle on your tax situation. If you get married or have a child, figure out your optimal tax filing status. Should you and your spouse file individually or jointly? Should you itemize deductions? Ask a tax expert for help answering these questions.

 

• Find a financial ally. Peoples’ finances tend to get significantly more complicated, with home ownership, marriage, children and other factors potentially now part of the equation. A trusted financial professional can be invaluable in helping you to navigate the monetary aspects of those new responsibilities, while also providing guidance on investments, insurance and other key aspects of your financial life. To find one in your area, visit the Financial Planning Association searchable national database of personal finance experts at PlannerSearch.org.

 

• Give yourself the gift of a formal financial plan. This document includes a detailed accounting of your assets and liabilities, your short- and long-term goals and priorities, and the specific steps, financial and otherwise, that need to be taken to meet them. A plan takes into account all aspects of your financial life to provide a concrete strategy for fulfilling your obligations and your goals.

 

• If you start a family, invest in insurance. If you have people who depend on your income, life insurance is a cost-effective way to replace that income should the unexpected happen. The death benefit from such a policy can provide funds for your surviving spouse to continue to make ends meet. Disability insurance serves the same purpose should you become disabled and unable to work to earn an income.

 

• Build an emergency fund — enough liquid cash to cover three to six months of household expenses is the typical recommendation from financial professionals. Keep the money in some type of savings account where it’s readily available in the event of a lost job or some unexpected major expense.

 

• Take basic estate planning steps. When you gain dependents and assets, it’s time to get your affairs in order: a will, powers of attorney and the like. Here’s an instance where it makes sense to enlist the help of an attorney well-versed in estate issues.

 

40s

 

• Regularly take stock of your assets and your financial plan — preferably with your trusted financial professional — to assess whether they are appropriately diversified to protect you from risk, whether they’re adequately diversified from a tax perspective to prevent you from being saddled with too large a tax burden later, and whether you’re on track for retirement. Do so at least annually, Cooper recommends. If your assets are not appropriately diversified for your age and risk tolerance, rebalance them to appropriate levels. What’s appropriate, and how to go about the rebalancing process? Those are issues to discuss with your financial professional.

 

• Start considering long-term goals, such as a target date for retirement. Is early retirement a possibility and a goal? Then consider the additional savings steps you need to take to fulfill that goal.

 

• Stay the retirement savings course. Beware diverting too much of your savings dollars to a child’s college education, because while you can get loans for school, you can’t do so for retirement. Cooper’s mantra: “Pay yourself first.”

 

• Start instilling smart financial habits and values in your children. It’s never too early to start modeling responsible financial behaviors with children and teaching them about the value of money. Once they reach certain ages, they can take on responsibilities such as managing their allowance money, tracking individual stocks on the stock market, even helping to pay bills.

 

50s

 

• Step up retirement savings. If you plan to stop working (and earning an income) sometime in your 60s or 70s, your 50s is the time to really push your commitment to retirement savings. Do so by maximizing your contributions to retirement accounts, taking advantage of so-called “catch-up provisions” in the tax code that increase retirement plan contribution limits once a person hits age 50.

 

• Take stock of potential retirement income sources. What sources are you expecting to provide income, how much will each provide, starting when, and for how long? These are questions to start pondering well in advance of retirement, so you can establish whether you’ll have enough income to cover all your needs and obligations, while also funding the fun retirement stuff you’re planning.

 

• Consider some type of long-term care insurance to cover a potentially expensive, nest-egg-shattering long-term health issue. Ask a financial or insurance professional for help evaluating your insurance options, and consider purchasing when you’re younger and in better health, to take advantage of lower premiums.

 

• Start developing a vision for retirement. What do you want to accomplish? What’s on your bucket list? Where do you want to live? While there’s no need to have firm answers to these questions from the get-go, it’s helpful for you (and your spouse) to mull these questions well in advance, to give yourself time to find answers.

 

• Make paying off your mortgage a higher priority. Many financial professionals suggest that people aim to pay off their mortgage prior to retirement, so they don’t have a large debt looming over them once they stop bringing home a paycheck. If that’s the goal, now is the time to consider options such as refinancing into a shorter-term mortgage or enrolling in a principal-reduction program offered by the mortgage lender to accelerate paying off what you owe.

 

60s

 

• Develop a strategy around Social Security benefits. To maximize the benefits you’re due from Social Security, consider waiting until full retirement age (66 or 67) or even to age 70 to start drawing benefits. On the other hand, if you need the income sooner rather than later, you can elect to start receiving them starting at age 62. Factors such as marital status, spousal income and a past divorce also may figure heavily into the Social Security benefits equation, so be sure to take those into account, perhaps with guidance from a retirement planning expert.

 

• Answer big retirement questions: At what age do you plan to retire? Where to live once you retire? To downsize into a new home? To relocate geographically? What vision do you (and your spouse) have for retirement, in terms of lifestyle, bucket list, etc.?

 

• Develop a strategy for handling required minimum distributions from retirement accounts. Tax law requires owners of 401(k)s and other “qualified” retirement accounts to begin withdrawing money from those accounts starting at age 70.5. How these RMDs are handled can have a dramatic impact on a person’s tax burden. Here’s another instance where advice from a retirement-oriented financial professional can be beneficial.

 

• Solidify your retirement income strategy. Now is the time to firm up the numbers: From which sources will your income come from, and when? How much will those sources supply? Will there be enough to cover you for a lifetime? How to make up for an income shortfall? Would it make sense to tax-efficiently convert assets in a 401(k) or other type of retirement account into income, such as through the purchase of an annuity contract?

 

• Fortify your cash reserve. Many financial experts suggest people deepen their cash reserves come retirement, to give them the option to draw income from those reserves when markets are down, so they don’t have to sell off assets whose value has dropped in order to generate income.

 

• Determine whether you’ll keep working. Do you want or need to continue working during your 60s and 70s? If so, to work full- or part-time? And what is Plan B, in case you intend to keep working but can no longer do so, due to reasons such as health.

 

70s and beyond

 

• Make an extra effort to stay healthy by eating right and staying active. The healthier you are, the less you’ll have to pay for health and medical care during retirement.

 

• Continue to keep an eye on spending habits. Are your assets on track to last as long as you need them to?

 

• Revisit your estate documents and revise them as necessary by updating beneficiaries, adjusting provisions of your will and other key documents, and clarifying charitable intentions.

 

• If necessary, adjust how your asset portfolio is allocated so it’s appropriately diversified and not too conservative or too risky for your age and circumstances.

 

• Enjoy — you’ve earned it! You did most of the heavy lifting during your 20s, 30s, 40s, 50s and 60s. Now it’s time to savor the fruits of your labor.