Your 20s and 30s can be the perfect time to begin preparing for the future by putting money away for retirement. Greater time spent accruing a nest egg equates to more total contributions and a longer compounding period - increasing the potential benefits. Here are five ideas to start investing for retirement in your 30s without making major sacrifices.
Tips to Start Investing for Retirement in Your 30s
If your 20s were not how you expected them to be from the point of view of retirement savings, there is no need to worry. You can utilize your 30s and make the most out of the age by working to invest for retirement. Here are some tips to keep in mind before you start your retirement planning in your 30s:
- Consider a 401(k) Plan
A 401(k) retirement saving plan is a basic tax-advantage company-sponsored retirement account where an employee signs up and agrees to send a percentage of their paycheck to their investment account. In addition to this, your employer can either match your total contribution or half of it. This plan is a pre-tax retirement plan where the taxable income is reduced, but the withdrawals during retirement are taxed.
Individuals under 50 are allowed to contribute under $22,500 for the year 2023, and people above 50 can contribute up to $30,00 and make a catch-up contribution of up to $7,500.
A 401(k) plan is a good choice for retirement savings even in your 30s since you get investment choices from the options your employer presents. Additionally, you are in control of your contribution to the account as long as you stay within the limit. You can add in as little or as much as you want and change the contribution levels at your convenience. Moreover, the earlier you start contributing, the more time you get to see your money grow till retirement.
- Explore the Roth IRA Option
Roth IRAs allow contributions to be made after tax, meaning no tax will be due in retirement. Furthermore, money invested in a Roth IRA will be tax-free as it grows. Tax diversification is best achieved by combining a 401(k) and a Roth IRA, as long as the income eligibility requirements for a Roth are met.
The IRA contribution limit is one downside to consider before going with an IRA retirement account. You can contribute up to $6,500 a year, with a catch-up limit of up to $1,000 for individuals above 50.
- Take Risks Till You're Comfortable
The potential for higher returns over the long run is one reason why investing when you're young is so important. Young people have a long-time horizon for retirement, which allows them to accept greater risks without worrying about short-term volatility. This means that at this age, you should invest around 70-80% of your long-term savings in stocks and stock mutual funds. With 30+ years until retirement, you have the opportunity to take on investment risks.
- Go for Inexpensive Diversification
Diversifying investments can be a great way to reduce risk when investing. To start, having enough money to spread around will help diversify your investments. Additionally, investing in index and exchange-traded funds can be a great way to diversify your investments.
Having an array of index funds can offer some diversification. To broaden your portfolio further, you can combine different funds, like one for international stocks and one or two for small and medium-sized US businesses. Moreover, investing in bond funds, which typically move in the opposite direction of stock prices, can also reduce the risk of stock funds.
- Don't Simply Think of Retirement
Retirement should be the primary long-term target; however, it is often considered the only objective. Planning for other milestones in life, such as a college fund for your children, holiday trips, or a deposit for a house, tend to arise more often in your 30s. It is important to prioritize these objectives, with retirement being the topmost. You can set aside additional money for these goals when you get a raise, receive a bonus, or pay off your car loan or student debt.
The Early, the Better!
Do not beat yourself to it even if you have not started your retirement saving planning in your 20s. Your 30s can be utilized as your ripe years for retirement savings. So, start as early as you can because the earlier you begin, the more time you get to see your money increase until you reach retirement.
As far as your concern runs regarding how much should be saved or invested in one's 30s to achieve the desired lifestyle after retirement, the answer is subjective. However, what is more, important is to be consistent with investments, have an appropriate investment strategy, and regularly monitor your portfolio to ensure that you are on track to reach your retirement goals.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning. Over the last 10 years, he has turned his focus to self-directed accounts and alternative investments.