You’re in your 30s and it probably feels like you’ve got all the time in the world to worry about retirement. Even if you’re saving money now, you might be focused on buying a home, having kids or setting up a college fund for the kids you already have.
There’s nothing wrong with those things, but the simple truth is that it’s never too early to start saving for retirement. In fact, one of the most common questions we get from our Addition Financial Members is this:
We’re here to help. If you’re wondering where and how to save for retirement, here are five of the best ways to get started.
#1: Participate in Your Employer’s 401K Program
The first way to start saving for retirement is by participating in your employer’s 401k program. Most employers have some kind of retirement savings plan, and the 401k is the most popular.
The best way to go about it is to contribute the maximum amount you can. In 2019, that’s up to $18,500 for a regular 401k and $12,000 for a simple 401k plan. Most employers allow you to allocate a percentage of your salary to go toward your 401k. IRS rules say you can contribute up to 100% provided you don’t go over the maximum dollar amount. However, many employer plans have limitations.
Keep in mind that if your employer offers matching contributions, you’ll be saving more than you could alone. Most employers offer a maximum matching contribution of 6% of your salary.
#2: Open an IRA
If your employer doesn’t offer a 401k – or if you want to save more than you can contribute to your 401k – then you may want to consider opening an Individual Retirement Account or IRA.
Like a 401k, you may contribute money to your IRA tax free through a traditional IRA. Or, you may choose a Roth IRA, which involves post-tax deductions with the benefit of not needing to pay taxes when you withdraw money.
In your 30s, the maximum contribution to an IRA is $6,000. Once you reach the age of 50, you can contribute up to $7,000 per year. An IRA of any kind is a good way to supplement your retirement savings.
#3: Take Some Risks
Once you have a retirement account, it’s time to think about your tolerance for risk. When you’re in your 30s, you can afford to take some risks because you have plenty of time to recoup a loss if you experience one.
There’s a simple rubric that we use to help you figure out asset allocation for your retirement. It says that you should subtract your age from 110. That means that:
If you’re 30 years old, you should put about 80% of your savings into stocks
At 35, the amount should decrease to 75%
At 40, the amount should decrease to 70%
Of course, if you’re risk-averse, you may want to lower the amount a bit or seek out low-risk stocks instead of buying speculative stock. However, it’s a good rule of thumb to invest at least 50% of your income in stocks when you’re in your 30s.
#4: Diversify Your Portfolio
You know the old saying that goes, “Don’t put all your eggs in one basket.” If each dollar you save for retirement is an egg, the saying holds true for retirement, too. In other words, it’s a good idea to decrease your risk by diversifying your investments.
What does that mean? Here are some examples of diversification strategies:
Put 75% of your money into stocks and 25% into something safe, such as CDs or municipal bonds.
Buy index and exchange-traded funds, such as the S&P 500.
Use a robo-adviser to create an investment mix that works for you.
The key here is to spread the risk around. It’s a good rule of thumb not to have more than 10% of your portfolio in any one place. That way, you won’t lose your money because one stock takes a nosedive.
#5: Keep an Eye on Company Stock
A lot of employers offer their employees shares of company stock as part of their compensation. They may also offer discounted stock prices to employees. It’s a way for the employer to save cash while still offering something of value to its workers.
The risk is that if you stay with one employer for a long time, you may end up with a disproportionate amount of your savings in your employer’s stock. If something happens to the company, you’d take a big hit – and potentially, with no way to recoup your losses.
Before you take advantage of your employer’s stock plan, do some research. Make sure your employer is ethical and don’t get too attached to your shares. Be prepared to sell them to ensure that you’re spreading your risk around. Otherwise, you may risk losing your life savings if your employer goes under.
Even when you’re in your 30s, there are good reasons to save for your retirement. The five strategies we’ve covered here will help you get started.
Click here to learn about Addition Financial’s retirement savings plans.