As the saying goes, “50 is the new 40″—and with Americans living longer than ever before, it’s not unusual for those in their 50s, 60s, or even 70s to be in their peak earning years.1 But for those who would prefer the option of an early retirement, it can be helpful to revisit your net worth (and investment strategy) at each milestone age to make sure you’re on track.
By your 30th birthday, experts recommend that your retirement savings equal your approximate annual income.2 They also recommend you have 2 times your income saved by age 35. But one’s ability to save for retirement (or invest outside their retirement accounts) largely depends on the job market they graduated into. Many members of Generation X and Millennials may not have found a career-focused position until their 30s, giving them a later start on saving than others.
When investing in your 30s, it’s important to remember that perfect is the enemy of good. Even if you can’t afford to max your retirement accounts yet, saving a little at an early age can reap major rewards in the future. And with 30 years or more until retirement, you can afford to take a little more risk (which might also yield higher returns) than someone who hopes to retire within the decade.
In your 40s, experts recommend you have three times your income saved in retirement accounts like a 401(k), IRA, or Roth IRA. For many, the beginning of their fifth decade can mark greater career stability and earning potential than ever before, making this an ideal time to save. On the other hand, one’s 40s can also bring child-related expenses and lifestyle creep (like more expensive houses, vehicles, and vacations). It’s important to maintain your commitment to saving for retirement during this time.
You’ll also want to review your asset allocation to make sure it still makes sense for your situation. In your 40s, you can still afford to take risk, but you may decide to dial back your stock exposure a bit. It might also make sense to consider diversifying your investments by looking into rental property or entrepreneurship.
By your 50th birthday, you should have around 5 times your annual income saved for retirement. This is also the point where you may want to move into slightly more conservative assets, even if you don’t plan to retire for a while. Nearly 1 out of every 3 people in their 50s will be downsized or fired at least once before retirement, and few are able to find new jobs that don’t involve taking a pay cut.3 By beginning to prepare for an unplanned or unexpected retirement in your early 50s, you’ll be far more nimble when the time comes.
When you reach your 60th birthday, if you haven’t yet started planning a specific retirement timeline, it may be time. You’ll be able to claim Social Security benefits as early as age 62, which can make the decision to leave the workforce much easier—and at age 65, you’ll be able to qualify for Medicare, which can often significantly reduce your health care expenses.4 The decision of when to begin claiming Social Security benefits, and when to retire, can be a tough one. A financial professional will work with you to optimize your benefits based on your individual circumstances.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Asset allocation does not ensure a profit or protect against a loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
1 https://www.as3executive.com/inspiration-and-facts/50-is-the-new-40-or-is-it/
3 https://www.propublica.org/article/older-workers-united-states-pushed-out-of-work-forced-retirement
4 https://www.hhs.gov/answers/medicare-and-medicaid/who-is-elibible-for-medicare/index.html
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