The sooner you start planning for retirement the better. Too many people wake up 20 years from now and wonder where all their money went. By having specific financial goals by age, your retirement will be more comfortable than if you had decided to just wing it.
I suspect being overwhelmed with choices is one of the main reasons why folks don’t start financial planning as soon as they find their first job. When you’ve got to decide between various retirement plans, various investments, and learn about various rules, it’s much easier to just hoard cash.
Heck, some people even find hoarding cash hard. It’s sometimes easier to spend all your money now on the good life instead of figuring out how to make your money grow over time.
Don’t procrastinate when it comes to retirement planning. The more time you have to let your money compound, the better.
To make retirement planning easier, let’s go through some financial goals to achieve by age. To make retirement planning even easier, I’ll just highlight one main financial goal by decade.
My goal for this exercise is to keep retirement planning as simple as possible.
My assumptions are that you are:
Every person should be able to achieve one of my recommended financial goals within 10 years, let alone 30 years. If you do, I’m confident that by age 60, you can retire comfortably.
If you can achieve two or more goals per decade, then you will likely be able to retire earlier than age 60. And if not, that’s OK too. The choice is yours.
Here are my financial goals by age to follow in this chaotic world. Let’s get back to basics!
The sooner you start contributing to your 401k, the more you’ll get to benefit from the power of tax-free or deferred compounding. Further, companies usually offer 401(k) matching, which is free money.
In 2021, you can contribute a maximum of $19,500 to your 401(k). If history is any guide, expect the maximum to increase $500 every two or three years.
Below is my 401(k) by age guide. The 401k by age targets will depend on your existing age, how well your 401(k) portfolio performs, and your employer’s generosity.
Bottom line: If you do nothing else for retirement in your 20s, contribute the maximum to your 401(k) each year. If you do, you will likely become a 401k millionaire by the time you’re 60.
With $1,000,000 or more in your 401(k) by 60 and Social Security benefits, you should be able to lead a comfortable retirement lifestyle.
In addition to maxing out your 401(k) in your 20s, use your endless energy to start a side hustle. It’s important to diversify your income sources to protect yourself and help grow your wealth faster. When you’re in your 40s, your energy to create new income streams will go way down.
Real estate is one of the best ways the average person can build wealth over time. Given everyone has to live somewhere, owning your primary residence over the long term will help you build equity, build credit, and get neutral inflation.
You want to ride the inflation wave, not get pounded by it. Inflation is an unstoppable force that tends to go up and to the right over the long term. As a result, renters lose because they tend to pay ever-higher rents over time.
The median homeowner literally have 40X – 60X more wealth than the median renter. When you are not putting some of your money towards regularly paying down mortgage debt and building equity, it’s easy to spend your money on frivolous things.
Sometimes, real estate will appreciate faster than the national rate of inflation. The rate of real estate appreciation depends on demographic trends, job growth, and income growth.
In your 30s, I’m not even asking you to go long real estate by buying more than one property. Getting neutral is good enough for this retirement action plan.
Bottom line: If you buy a home and pay it off by the time you retire, your net worth will be equivalent to at least the value of your home. Further, you’ll be able to afford your retirement lifestyle much easier. For most retirees, shelter and healthcare costs are the two main expenses.
If you can combine a million dollar 401(k) with a paid-off house, you shouldn’t have a problem living a comfortable retirement lifestyle.
If you decide to actually go long real estate by owning more than one property, real estate is one of the easiest ways to generate passive income as well.
Your 40s are incredibly important because your responsibilities have likely ticked up. Maybe you have a spouse and children to take care of. Or maybe you have elderly parents who need all sorts of support. Maybe you’ve got some of your own health issues to deal with.
If you have a family, nothing else will matter more than your children. Given you will love your children more than anything, you will need to do the following:
You shouldn’t have any revolving consumer debt in your 40s. Further, any student loan debt should be paid off before you turn 50.
The only debt you may still have is mortgage debt, which is considered the least worst type of debt because it is tied to an asset that usually increases in value over time.
Bottom line: Once you’re in your 40s, you must start shifting your financial goals more from capital accumulation to capital protection. You’re likely no longer just living for yourself, but for other people as well. Therefore, taking maximum risk is no longer the responsible thing to do.
You need to protect yourself against an illness, a death, or a bear market. These things will not only rob you of your wealth, but of your time. If you have people depending on you, it’s imperative to get all your estate issues in order.
After more than 30 years of work, you may finally be feeling a little burned out. You can see the finish line, but you don’t want to negotiate a severance just yet.
Instead, your work goal may be to hit a magical age so you can collect a higher pension. Or, you may want to stick with work until your kids graduate from college. Or, you simply haven’t figured out what you want to do once you retire.
Whatever the case may be, it’s hard to leave work now because you’re probably in your prime earning years. At the same time, you’re thinking about your mortality more than ever before.
Maxing out your 401(k) and paying your mortgage should be mere afterthoughts due to your higher income. Perhaps you will have already paid off your mortgage in your 50s.
With excess cash flow, it is important to focus on beefing up your taxable investments. It is your taxable investments that will give you the confidence to finally retire in your 60s.
Below is an after-tax investment account guide to stretch for by age. Your goal is to accumulate a taxable investment portfolio that is 2X to 3X larger than your pre-tax investment accounts such as your 401(k) and IRA. Yes, you don’t have to have multiple millions to retire comfortably. But if you have the potential to do so, I say why not try.
Bottom line: Having a large enough taxable investment portfolio is the holy grail of personal finance. Utilize as much of your free cash flow as possible to build your taxable investment portfolio. Make it so big that you start viewing your 401(k) like a bonus portfolio. Treat your 50s like the last leg of a financial race.
Congratulations on following the various financial goals by age. With a paid-off home, a million dollar 401(k), all your estate issues squared away, and a large taxable investment portfolio, you should be able to enjoy retirement to the maximum.
Feel free to spend more money on wonderful experiences. Go ahead and buy those things that you think will make you happy. You’ve earned it. Hopefully, you’ve been enjoying your life up to this period as well.
What’s amazing about taking care of all your financial needs by yourself is that you also get a bonus in the form of Social Security. Not once have I mentioned Social Security until now because I think it’s good to not rely on an underfunded national pension system.
We tend to take our finances more seriously when we are in the mindset of only depending on ourselves. The reality is, Social Security will likely still be there for us when we retire at a traditional age. Perhaps we’ll only get 70% of what was promised, but we should still at least get something.
Here’s an example using Social Security’s “quick calculator.” If you were born in June 1960 and earn $50,000 annually on average, here’s potentially how much Social Security you could collect at different ages:
In other words, if you can wait until 70 years old to collect, your Social Security benefit will be almost double. Run your own Social Security calculation to see what you can get.
If you are in good health, consider collecting Social Security as late as possible to get a higher payout. If you are in poor health, then consider getting Social Security earlier.
Sometime in your 60s, your net worth should be at least 25X your annual expenses or 20X your average annual gross income. Once you hit these multiples, you have achieved financial independence.
Bottom line: By reaching just one financial goal per decade, you should be able to retire comfortably by your 60s. There’s no need to overcomplicate your finances. If you want to retire earlier, then it’s up to you to save and invest more aggressively.
There’s a good chance that if you follow all my financial goals by age, you will likely die with too much money. Therefore, run your numbers through a retirement planner and calculate how much more you should be able to comfortably spend.
In the below retirement calculation by Personal Capital, this 41-year-old person wants to retire at age 50 with a $3.5 million portfolio. If he does, he will have an excess gross monthly cash flow of $6,000. Therefore, this person can either retire sooner, spend more money, or cut his return assumption numbers.
The key is to run your numbers through a retirement planner so you can make various financial assumptions. Don’t fly blind when you don’t have to. Once you decide what financial assumption you’re most comfortable with, then you can spend accordingly.
Things change over the decades. In your 70s, it’s time to revisit your will or your revocable living trust to see whether your beneficiaries are still appropriate. For example, your favorite son may have dishonored your family name. In which case you may want to cut him out.
Dying with “too much” is an individual determination. Some of you may think that leaving anything more than just enough to cover your funeral and estate expenses is too much. Others may think that leaving anything more than the estate tax threshold is too much.
Whatever the case may be, you need to make your financial wishes clear before you die.
Finally, it’s good to think about what type of legacy you want to leave behind. What do you want to be known for? Who do you want to help into perpetuity long after you are gone? Only you can decide.
Once you’ve set up a financial plan, stick to it over the long run. Having a financial goal by age makes retirement planning much simpler.
Remember, it is not a sacrifice to save and invest for the future. It is a privilege! Even if you don’t achieve all the financial goals by decade in this post, you’ll be much better off than those who didn’t plan and try.
Although life goes by quickly, I’ve found that the stronger you can boost your finances, the more you’ll be able to slow down time.
With stronger finances, you are free to do more of the things you want and less of the things you hate. Having the freedom to choose how you spend your time is priceless.
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Readers, what other financial goals by age would you recommend?