Financial Planning Through the Years
How to approach finances during three phases of life
Taking a good look at one's finances is always, well, a good idea. Doing so can help people plan for the future by balancing short-term and long-term needs and creating a savings and investment portfolio that will pay dividends over time.
Because people's needs change, strategies vary during three different periods of life.
Young adults — men and women in their 20s and 30s
As the old saying goes, it's never too early planning for the future.
"The earlier you start investing for retirement, the longer your money has to mature and grow and individuals who start saving in their 20s are at a serious advantage over those who wait until middle age," writes Kathryn Tuggle of FOXBusiness.com.
Here are some ways to get the ball rolling:
Enroll in your employer's retirement plan now
If their employer offers a Roth IRA, young adults should begin contributing now, especially if the employer matches their contribution. And, says Tuggle, if the company doesn't offer a Roth IRA, individuals can establish their own.
Focus on liquidity with savings accounts
Tuggle recognizes that young adults probably have financial obligations such as student loans and car payments and that unforeseen events can crop up. That's why it's important to retain enough money — the writer recommends holding three to six months' worth of income in that account — in an easily accessible account, preferably at a bank or credit union.
Middle age — men and women in their 40s and 50s
Financial planning experts say they're often surprised by how little planning many people in their 40s and 50s have done; however, just as it's never too early to start, it's never too late either.
Take stock of your expenses — and increase savings
For people who are starting to worry about retirement, it's probably time to buckle down.
"If you've saved a significant portion of your paycheck over the last 15 to 20 years — in general, planners say that's at least 10 percent of your salary — you may only need to tweak your habits," writes Leslie Haggin Geary of Bankrate.com. "But, if you've neglected retirement, you're probably going to have to push hard to make it to your proverbial finish line."
That could mean making some tough decisions or, at the very least, compromises. As Geary writes, one such compromise could include a conversation with a son or daughter about college: If you're going to make retirement a priority, you may have to ask children to earn a greater share of their own tuition money.
Mix it up
Fortysomethings should keep diversity in mind when it comes to investments and holdings in general.
"Asset allocation and diversification remain as important as ever," writes Geary, who adds, "Maintain a broad view of all of your holdings as you reallocate assets. It's not just enough to focus on the 401(k). Look at the big picture, taking all of your investments into account. … Make sure you haven't forgotten anything, either, like a 401(k) or other benefits you may have earned at previous jobs. If it's an old 401(k), roll that into an IRA, which you can invest any way you want."
Retirement or near-retirement age
Even if you haven't planned for retirement or haven't planned strongly enough, don't despair, says the website money-zine.com.
"If you agree with the mind-set ‘it's never too late,' then you'll appreciate what retirement planning in your 60s is all about," money-zine.com notes. "When it comes to retirement planning, you don't ever want to give up and concede it's too late." In fact, men and women in their 60s may even have a few advantages, the website declares: "[M]ost of your larger household expenses should be out of the way or paid off," and "you're at or near your peak earning years."
Here are a few strategies to take a look at:
- Start crunching the numbers. Figure out how much retirement funding you'll need and calculate the growth of your retirement funds over time.
- Decrease spending. Yes, it's obvious. But the more people who are nearing the end of their careers do now to scale down spending, the less they'll have to do it during retirement.
- Try playing catch-up. If you have the money on hand to contribute to a 401(k) or an IRA, it's a good idea to put as much as possible into one of these accounts — but keep in mind that the IRS puts a cap on contributions for individuals age 50 or older.
These are just a few of the steps that adults of all ages can take in order to plan for their future and for their retirement down the road.