As a responsible investor, you should be aware of the financial thresholds you should hope to achieve at each stage of life to ensure you are prepared for retirement. Saving for retirement is a lifelong process that should begin when you’re a young adult and become more refined as you age. As such, it’s vital to understand where you should be to gauge your situation properly. Here’s some insight into the financial thresholds you should try to hit based on your age.
Understanding Your Need for Financial Security
There are a lot of factors that make up your retirement fund. Your savings account is just a small portion of this equation. For most, retirement will include savings, assets, and more. This approach leaves you better prepared as the USD continues to show losses in value. Typically, you should put aside at least 5-15% of your income for retirement.
Net Worth
The concept of net worth must be understood to prepare for retirement properly. Your net worth is the culmination of all your assets and funding minus your expenses. Your assets include properties, savings, businesses, or other ways you generate revenue. At each stage in your life, your net worth should reflect your retirement goals. Notably, the median net worth of US citizens is far below the amount needed for retirement (more on that later).
Source – Empower
Your Location Matters
The first thing you should take into consideration when determining how your retirement strategy is going is the location you plan to retire. The cost of living in each city and state differs greatly. Large cities like New York or Los Angeles are going to cost a lot more to retire comfortably in versus less ‘glamorous’ locations.
The cost of living index combines a variety of factors to determine the actual cost of living in an area. This index should act as a guide. It makes finding a city that will enable you to live a fulfilling and healthy retirement easier and should be added to your strategy.
Financial Thresholds to Hit
Understanding what financial thresholds to hit will enable you to gauge your progress in real-time. It will also let you know if you need to alter portions of your strategy to remain on schedule for your retirement. Notably, the younger you are, the more difficult it may seem to get into the retirement mindset. However, the earlier you start, the easier the process.
Financial Thresholds to Hit in Your 20s
According to the latest Federal Reserve Survey of Consumer Finances (2023), the average income for someone in their 20s ranges from $29,770 – $38,000. This is the early stages of your investment career; for most people, it’s the first time saving for retirement has become important.
Retirement may seem far off, but it’s approaching faster than you may realize. It’s in these early stages that it’s the most difficult to accumulate funding towards your retirement. The main factors hindering your attempts are lower earning potential, lack of careers, stability, and education. For many people, these years will be learning both in and out of the classroom.
Financial Discipline
Improving your financial discipline should be the priority in this stage of life. You need to learn about debt management, how to control spending, how to build an emergency fund, and how to improve budgeting skills. All of these factors will help you when you go from that entry-level $20k position to a career opportunity, enabling you to save more.
The best option for this age group is to select a career path. From there, it’s a great time to start a 401(k). Most employers offer this option nowadays, making it easy to get the ball rolling. Also, focus on improving your financial understanding, which will make it easier to save for your home, retirement, family, and future assets, such as businesses.
How Much do I Need to Retire?
There are many different equations to determine if you have the proper savings for retirement. The most common is to shoot for 1 to 1.5 times your annual income when you’re young. If you make $100k yearly, you should have around $100-150k saved.
Financial Thresholds to Hit in Your 30s
Now that you hit your 30s, you unlock the door to better pay, positions, and more opportunities. The average income for people in their 30’s in the US is $39,000 – $49,000. The average savings for your 30s is $20, 540 with the median saved sitting at $5,400.
For most, you’re making double what you did in your 20s. This extra funding can be the key to jump-starting an effective retirement plan. Unlike your younger years, you’re now focused on obtaining assets, improving your career, and building a stronger foundation for your future. In your 30s, you should place extra emphasis on your retirement and savings plans. This is a good time to reduce debt, like student loans, as much as possible.
Grow Your Savings
Notably, this is a great time to continue growing your savings and venture into investing. Investing your funds can be a smart way to put your savings to work. However, you need to have a strong financial mindset and understanding to ensure that you don’t risk savings that were designed for your retirement rather than funds designated specifically for investing.
Those who successfully learned financial and investing disciplines will see their hard work and determination begin to show at this point. Their added understanding enables them to avoid common pitfalls that those who didn’t build a strong final education earlier usually encounter.
Home Ownership
Most people will seek to acquire their first home in their 30s. To accomplish this task, you need savings and an understanding of the real estate purchasing process. Your first home is one of the most important investments you can make. As such, it’s wise to take the time to learn about real estate and other investments that could help make your 40s easier.
Retirement is creeping closer, and you now have more responsibilities. For example, most people have children, car payments, and a rent or mortgage to cover while still building their retirement funds. As such, here, you need to focus on keeping spending in check and not falling for common pitfalls like purchasing a house that is too expensive.
How Much do I need to Retire Safely?
The 30s is still a good time to aim for around 1 to 1.5 times your income in savings. You just started your career, and you have major expenses like a family and home down payment that will slow down the savings process.
Financial Thresholds to Hit in Your 40s
As you enter your 40s, your financial priorities will change. You now seek out much less risky investments compared to your 30s. Also, you have investment experience and have lived through several market cycles. At this age, the average income is $50,000. The average saved is $41,540, with the median at $7,500.
Most people in their 40s have considered budgeting for their retirement. You’re older now and have more financial responsibilities. It’s at this age that people slip up on their retirement by overly spending on new homes, vacations, and other liabilities.
As such, it’s vital to keep your spending in check and focus on building up assets. For example, rental properties are a great way to create passive income that can support you even when you get too old to work. You should already have 3x your yearly income saved by the time you approach your 50s.
A person making $100k a year should have around $300k saved towards retirement. They should also have some assets that will help ensure their retirement funding doesn’t dry up, even in times of high inflation and low buying power.
Financial Thresholds to Hit in Your 50s
You’re now in your 50s, and retirement is just around the corner. This is the last lap of a race you have run your entire life. The average income for this age group remains the same as that of your 40s, at $50,000. By this time in your journey, you should have around 6 times your yearly income saved up.
The added savings can help provide you access to investment opportunities. You will have established a professional carer and should have several assets like rentals, which will provide additional income to supplement any earned income you still receive.
In your 50s, it’s smart to diversify your portfolio. At this age, your investments need to be low-risk and proven strategies. The goal is to max out your retirement funds by utilizing assets to generate passive income. This approach enables you to stop working directly without reducing your quality of life during retirement.
Financial Thresholds to Hit in Your 60s
In your 60s, you will hopefully retire soon. Notably, there’s little change between what a 40-year-old and a 60-year-old make on average. However, you should have substantial savings and assets working in your favor at this time. It is also at this age that many people switch to a fixed income via pensions and other retirement strategies.
You should have 12x your working year salary at this time saved. These savings, combined with your asset income, should be enough to keep your lifestyle and allow you to help the ones you care about most. Notably, in your 60s, your income is more predictable, but your expenses can suddenly change depending on your health and other factors.
Starting Early is Crucial to Your Success
One thing that you need to consider is how starting early makes retirement planning so much easier. Planning for your retirement is a marathon, not a sprint. As such, you don’t need to figure out some massive payday to live comfortably when you’re older.
The best strategy is to slowly accumulate wealth over time, alongside your financial understanding. As you mature, your retirement funds will see growth, reflecting your better understanding and opportunities.
Changing your investment strategy based on your age
One thing to learn is that you can invest differently when you are younger as you have time to recover from losses. As such, younger investors can take advantage of emerging technologies like Bitcoin to escape inflation and other issues that plague traditional markets.
Tips for Building Net Worth
Some tips for building your retirement fund can make the process much easier. These steps will ensure you don’t end up in a precarious situation as your age sets in and your options become limited.
Pay Down Debt
The first recommendation is to focus on eliminating high-interest debt. Debt payments like credit cards are the top reason people have no savings. These payments are designed to increase over time, leaving you little left to put towards retirement. Focus on paying off credit cards, student loans, and mortgages, ensuring your income can go towards your life and retirement.
Control Spending
Another tip is to learn to control your spending. It’s sad to see someone who made a healthy income not have any savings due to reckless spending. This step comes down to controlling your emotions and habits. Don’t be surprised if you have no retirement if you have a gambling problem or drug habit that takes up all of your extra income.
Set spending limits and stick to them. These limits will help build your financial discipline and ensure you don’t let your emotions come in the way of strong financial decisions. Once you master controlling spending, you’re ready to start saving on a new level.
Automated your Saving
Automating your savings process is a great way to simplify retirement. This step can be done in a variety of ways. You can have a retirement fund that automatically removes funding from your paycheck and puts it outwards as an asset or 401(k). This approach ensures the funds go where they are supposed to promptly.
Automating your savings is easier than ever. Apps like Acorn enable anyone to automatically send their change from purchases to their retirement account. This easy-to-use app is free to download and is just one of many savings options that automate the process.
Financial Thresholds are not Set in Stone.
Now that you understand the financial thresholds you should seek to achieve to build a healthy retirement fund, you’re ready to start the process. Notably, growing your retirement fund should coincide with growing your financial literacy. Then, you’ll have the funds to retire and the understanding of how to use them.
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