In each decade of our lives, we go through new transitions and adopt new personal, professional and financial priorities. Although that journey is unique to each of us, there are some comon life transitions that most people navigate in each decade.
Here are some tips for optimizing your financial well-being during the progression of financial planning in your 20s and 30s, in your 40s and 50s, and in your 60s and beyond.
Your 20s and 30s: The Accumulation Phase
In your 20s and 30s, you are “adulting” your finances — establishing your own home, settling into your career and maybe starting a family. We call this the “accumulation” phase, when you are earning money and, ideally, setting some aside for retirement.
In this phase, it’s best to keep it simple. Hiring an advisor may not be in your best interest, although this decision depends on your situation. In many cases, we encourage people who are in this phase of life and work to use the information that is so readily available to us today in books, blogs, short videos and other web offerings to learn how to optimize their financial well-being. These resources are not only useful but very cost-efficient.
It is important in this phase to pay off consumer or student debts, build cash reserves in the form of emergency savings and use workplace plans like 401(k)s or 403(b)s to start saving for retirement and financial independence. Ideally, these plans will also have matching funds from your employer, which will enable you to build that nest egg at a faster pace. In this phase, time is your best ally. The sooner you begin saving money for the future, the more you can take advantage of compound interest to grow that money over time.
During this phase of your life, you can, generally speaking, take more risks than you can as you near retirement because if you make mistakes, you still have plenty of time to make up for them. Take advantage of this benefit of youth! If you begin investing, then I do recommend seeking the advice of a financial advisor.
Your 40s and 50s: Retirement Transformation
By the time you reach your 40s and 50s, you are most likely in an established career or have built a business, and you are starting to think about the eventual transition to retirement and what that might look like. In this phase, it can be valuable to hire a financial advisor to help you lay out your goals, time your retirement, avoid excessive risks and, most importantly, be your coach and advocate, working with you as you navigate the tough financial decisions that can come in this phase of your life.
An advisor can not only provide some of the more technical information and strategies for your particular situation, but just as importantly, ask the right questions. For example, “How will the past 30 years of your life impact the next 30?” and “What strategies are available to monetize your business and real estate portfolio or help you determine income sources and how to best access those funds?”
Your professional advisory team will work with you to determine Social Security or pension claiming strategies, tax and estate planning, and other considerations.
As with any phase of life, there are upsides and downsides. It’s great to have considerable work experience by this time in your career and to be considered an expert in your field. Also, your children might be heading off to college or their own careers, so you and your spouse can begin focusing on activities you might have sacrificed over the years as you raised your children.
However, many people at this stage of life also experience some challenges, such as caring for aging parents, often while also still caring for minor children. Although we never know what surprises might be around the next corner, advance planning always eases the burden and helps you be as prepared as you possibly can.
It’s also important to make sure your portfolio’s assets are allocated in alignment with your priorities at that stage of your life. Also update any insurance coverage that needs to be adjusted, given any circumstances that have changed.
Your 60s and Beyond: Utopia
Your “time horizon” is the amount of time you have to continue working before you retire. This is an important factor for your advisory team to use in determining how you will fund your retirement.
And then once you retire, you cannot keep retirement funds in your accounts indefinitely. You generally have to start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA or retirement plan account when you reach age 72 (or age 73 if you reach 72 after Dec. 31, 2022). The IRS requires that you begin making required minimum distributions (RMDs) at this milestone.
In essence, once you reach the appropriate age, you will begin distributing money to yourself that you saved during all those years of accumulating funds.
Your RMD is the minimum amount you must withdraw from your account each year. You can withdraw more than the minimum required amount. Those withdrawals will be included in your taxable income, except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).
Roth IRAs do not require withdrawals until after the death of the owner; however, beneficiaries of a Roth IRA are subject to the RMD rules. Designated Roth accounts in a 401(k) or 403(b) plan were subject to the RMD rules for 2022 and 2023. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts.
One retirement is on the horizon, talk with your advisor about whether it makes sense for you to consolidate multiple retirement accounts so it’s easier to manage your investments and maybe reduce fees. Individual retirement accounts (IRAs) you have with different providers can be consolidated at any time, and there are no tax consequences or tax-reporting requirements when the assets are transferred directly between providers. Also when you retire, you can typically consolidate your 401(k) account to an IRA through a rollover. Some 401(k) plans will allow you to do a rollover while you are still working.
As you bring your career to a close, talk with your advisor to determine if you should pay off your mortgage before you retire. Also, start thinking about whether you want to keep working during retirement, maybe part-time and maybe in a field unrelated to the career you have pursued up until retirement.
Once you begin receiving Social Security retirement benefits, the government considers you to be retired. You can get Social Security retirement or survivor’s benefits and work at the same time. However, there is a limit to how much you can earn and still receive full benefits.
If you are younger than full retirement age and earn more than the yearly earnings limit, your benefit amount may be reduced. If you are under full retirement age for the entire year, $1 will be deducted from your benefit payments for every $2 you earn above the annual limit. In 2024, that limit is $22,320. In the year you reach full retirement age, $1 in benefits will be deducted for every $3 you earn above a different limit. In 2024, this limit on your earnings is $59,520. The government only counts your earnings up to the month before you reach your full retirement age, not your earnings for the entire year.
As you can see, it is extremely important to time your retirement in a way that allows you to make the most of all your options. Your advisor’s guidance will be invaluable in this process.
Consider the non-financial aspects of retiring well
Now, the financial concerns discussed here are all vitally important to retiring well. However, retirement is about much more than just the numbers; it’s also about living your best life possible in terms of your activities, social network and health.
We work with a lot of exceptionally accomplished individuals who have done very well for themselves throughout their careers. However, many of them were so focused on working hard, getting ahead and building their companies that they neglected to cultivate hobbies and other interests outside work. As a result, they find it difficult to retire because they don’t know how to do much else but work.
To avoid this situation, start developing hobbies and friendships outside work when you are in your 50s and 60s. Figure out how you enjoy spending your time when you’re not working. Give yourself time to discover those interests well before you retire. What can you do with your time that you are just as passionate about as your work? Often, it can take some trial and error to figure this out.
With advance planning, you can reduce worry and optimize your financial well-being during every phase of your career and into retirement. We can help. Please reach out to us with any questions you have about making the most of your situation.
Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
