Financial Planning Decade by Decade
Here we are again, concerned about the market and the economy, wondering what tomorrow's news will be. And whether you're in your twenties and paying attention for the first time or in your seventies experiencing deja vu, economic uncertainty can take you on an emotional rollercoaster. So of course I'm getting questions from readers of all ages struggling with how to cope.
While I can't provide an answer for every individual situation, I do have one strong recommendation for everyone: have a financial plan—and stick to it. This isn't something complex or esoteric. It's not just for older people with more assets. A financial plan is basically a roadmap to keep you going forward no matter what the economy is doing.
Your plan will change, of course, as your life and goals change. But maintaining a big-picture view while following certain signposts at each stage in your life will help you take control of your money and be less concerned about current headlines.
Need some help getting on track? Here are my suggestions—decade by decade.
In your 20s: Set your direction
Set yourself up for greater financial security—and less future worry—by establishing good money management habits from the get go. Here's how:
- Create a budget—Know how much money you have coming in and be conscious of your spending. Needs come first, then wants. Live within (and hopefully even below) your means.
- Start saving—Creating an emergency fund should be your first savings priority. To make saving easier, include it as a line item in your budget. In addition to an emergency fund, you should also start saving for retirement in your 20s—no, it's not too soon. Take advantage of a 401(k) or open an IRA, and invest those funds—don’t leave them in the account uninvested. Once you're on track for retirement, start saving and investing for other goals.
- Establish good credit—Use credit cards wisely. Avoid unnecessary debt, and make every effort to pay off balances in full each month.
- Get insured—Health insurance is a must. You may also need auto, renters or homeowners insurance, depending on your circumstances.
In your 30s: Start building
Career, family, homeownership—the 30s are often a time when life changes at a fast pace. And your financial planning has to keep up. Here's what to focus on:
- Increase your savings—Contribute as much as you can to a 401(k) or other employer plan and take full advantage of any company match. Make sure your emergency fund will cover a minimum of 3-6 months of necessary expenses. Keep saving toward your other goals.
- Become an investor—Put your money to work in a diversified portfolio that matches your timeline and feelings about risk. Maintain a long-term view no matter what the market is doing.
- Plan ahead—Have at least a basic will naming a guardian for minor children. If you do have kids, start saving for their education. Look into life insurance.
In your 40s: Ramp it up
At this point you're likely approaching your peak earning years, so this is the time to ramp up your savings and avoid lifestyle creep. To protect what you have and plan for the future, be sure to:
- Make retirement a priority—Make the most of tax-advantaged savings accounts. Employer retirement plans, IRAs, even Health Savings Accounts (HSAs)—contribute the max to not only get the tax benefit but to ensure you're on track for retirement.
- Increase your insurance—Consider adding umbrella and disability policies. Also think about increasing your life insurance as your income increases.
- Include your family—If you have a partner, make sure you both are on the same page about financial goals and future plans. Take money out of the closet. Openly discuss finances with your parents as well as your children as age appropriate.
In your 50s: Keep it moving
Whatever direction you've set for yourself, don't stop now. But do review where you are and make additions and changes to increase future security. Now's the time to:
- Plan for retirement—Start by looking at what you've saved and what your expenses may be. Set a timeframe for when you'd like to retire. If you’re behind, see how much more you can save, and take advantage of catch-up contributions.
- Review your portfolio—Stay diversified, rebalance at least annually and make sure your portfolio is in line with your current feelings about risk. Keep in mind that money you'll need in the next five to seven years shouldn't be in the stock market.
- Look into long-term care insurance—It's not something most of us like to contemplate, but now's the sweet spot to consider LTC insurance, since it usually becomes more expensive as you age.
- Create or refine your estate plan—You may already have a will and possibly a trust, but if not, act now. Also create an advance healthcare directive.
In your 60s: Start to transition
This is the time to make important decisions about how you'll handle your finances in retirement. Make sure to:
- Be specific—Think practically about how and when you want to retire. What's a realistic timeframe? Will you stay where you are or move? What will your expenses be? Make sure you and your partner agree.
- Explore Social Security and Medicare options—These are valuable benefits that can make a real financial difference in retirement. Understand the timing rules and regulations so you can take maximum advantage of both.
- Create a retirement paycheck—Add up income from outside your portfolio like Social Security, pension, real estate, etc. Then calculate what you'll need from your portfolio to cover expenses, and decide how best to make withdrawals. Aim to keep enough in cash to cover one to two years of expenses so you're not forced to sell in a down market.
In your 70s (and beyond): Adjust as needed—and enjoy!
If you've stayed on track—and kept your cool in spite of economic ups and downs—you deserve to enjoy what you’ve worked so hard to achieve. As you move forward:
- Strike a balance—A lot of seniors remain active and working, for good reason. Part-time work can be a pleasure as well as a financial boost. Travel, family, and personal pursuits can also be fulfilling. Find the balance that suits you personally and economically.
- Modify your retirement income plan as needed—You may need more income early in retirement, less as time goes by. Keep on top of resources and expenses. Factor in required minimum distributions (RMDs)—and take them on time, or you’ll be penalized!
- Update your legacy and charitable planning—Make sure your beneficiary designations, wills, trusts and charitable giving plan reflect your current wishes. Be open with your family about what you've set up so there are no surprises.
As always, a financial advisor can help you fine tune your plan. But wherever you are on your economic timeline, one thing is sure: Life will change—and so will these uncertain times. Having a financial plan, no matter your age or the state of the economy, will help keep you on track.
Have a personal finance question? Email us at email@example.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.