In your 30s, take responsibility. You may buy your first home and raise a family. Marriages, mortgages and small mouths to feed can reduce your income. Even the family dog eats a portion of your paycheck.
It’s easy to think that saving for retirement is impossible in your 30s, but it should remain a top priority, especially as your salary increases. You have to work hard to balance spending with savings.
1. Ramp up your 401(k) savings
Ideally, you’ll make the maximum allowed contribution each year to an employer-sponsored fund, such as a 401(k). For 2023 it is $22,500. As you move up the career ladder, increase your retirement savings instead of spending.
If you can’t save all of your paycheck into a retirement fund, increase your contributions gradually, advises Dee Lee, CFP and author of “The Complete Idiot’s Guide to 401(k) Plans.”
“Let’s say you get 3% in your 401(k) to qualify for the company match. Add another. Then you can add another percent from your salary a few months later, so you end up saving 10%–15% of your income,” Lee said. You won’t miss out on money if you build up your savings slowly.”
Even an additional 1% increase can make a big difference in the long run. For example, a 30-year-old who saves 6% of his $50,000 salary annually, or $3,000, will have $1,159,517 in the bank when he is required to start withdrawing money from his 401(k) at age 75. (This assumes an 8% annual growth rate.)
If the same person increased their annual contributions by just 1%, or $500, they would have $1,352,770. The difference is $193,253. Use Bankrate’s calculator to see how your retirement contributions affect your salary.
Keep adding to your emergency fund as well. Shoot enough to cover essential expenses for six months.
2. Open an IRA
If you’ve put as much as you can into a 401(k) or other employer-sponsored fund, pat yourself on the back, then open a separate IRA.
In 2023, individuals under age 50 can save up to $6,500 in a Roth IRA or traditional IRA.
Ed Slott, nationally recognized retirement expert and author of “The Complete Retirement Planning Roadmap,” says everyone should open a Roth. You save with after-tax dollars, but the earnings on your investments grow tax-free.
“The greatest monetary asset anyone can have is time,” Slott said. “So young people should take advantage of the decades of tax-free compounding available to them through Roth IRAs.”
Unlike other retirement plans, you don’t have to pay money out of a Roth. Earnings can grow as long as you want. However, there are income limits for contributing to a Roth IRA.
If you haven’t qualified for a 401(k), look into a traditional IRA. There are no income requirements as long as you are not enrolled in an employer-sponsored retirement plan. You get tax deductions for contributions and tax-deferred earnings, meaning you pay income tax when you withdraw money.
3. Maintain an aggressive asset allocation
It is not enough just to save. You should also keep an eye on your existing retirement assets to make sure you aren’t wasting opportunities for growth.
In your 30s, you should invest aggressively, allocating 80%-90% of your assets to a variety of stocks, says Ellen Rinaldi, former head of retirement planning at Vanguard.
The important thing is to stay focused on your goals during market volatility. The stock market goes up and down. Rejection is hard, but normal.
“Young people have the ability to weather setbacks and they can wait to rebound,” says Slott. “They can set it and forget it, within reason. Then the market will be good for the long term.
4. Keep the company in check
Don’t fall into the trap of neglecting your assets, including the stock in the company you work for. If your stock in a company has done well, it could be a big part of your retirement investment.
Financial planners generally agree that corporate stocks, or any other equity, should not exceed 10% of your portfolio. Any more than that and you may be putting your retirement at great risk. “Your savings shouldn’t be determined by the health of one company,” Rinaldi said.
Slott agreed. “It’s an old saying, you don’t put all your eggs in one basket,” he said. “The last thing you want is to lose your job and your retirement savings at the same time because your stock is going down.”
5. Don’t let a better job get in the way of your retirement plans
If you change jobs, don’t let your pension fund take a hit. Too often, workers choose to cash their 401(k) from their previous employer.
If you take your money out before age 59 1/2, you’ll pay a 10% penalty on top of your income tax, which can be as high as 37% if you’re a high earner. In response to the pandemic and the brief recession, the fee to attack the 401(k) early was waived in 2020.
The smart move is to roll over your 401(k) into an IRA, which you can then invest the way you want.
Bad timing is another costly trap. Most employer-provided retirement plans require you to work a certain amount of time before you’re eligible for full benefits, known as “vesting.”
For example, with a 401(k), you can save 20% of your employer’s contribution after one year, but you have to work another year to earn an additional 20% and so on until you’re done. Pensions are structured slightly differently, with benefits usually available after five years of service.
If you are about to reach a milestone that will allow you to save more, or all, of your employer pension fund contributions and retirement benefits, it may be worth waiting before you leave your job.
6. Start preparing for college expenses with a 529 plan
Those with young children, remember: It’s never too early to start thinking about college. But financial advisors strongly recommend that you still make retirement savings a top priority.
“A secure financial future is important,” said Bruce McClary, a spokesman for the National Foundation for Credit Counseling. “It’s up to you to provide the majority of the funding to complete your golden years. No one else is going to do it.”
529 plans are a great way for parents to save for education, McClary said. A 529 plan—so called because it is mandated by Section 529 of the federal tax code—is a tax-advantaged savings plan for a college or university education in elementary or high school.
“Use the 529 college savings plans that are available,” McClary says. “It’s a very affordable way to put a child through college instead of having to independently set aside money to send them somewhere else.” Families should also find out if there are work-study programs, grants, loans or scholarships that will help finance their children’s education.
If you decide to send your child to Harvard, start saving early. As with any other big-ticket expense, it’s easier to save a little in the long run than trying to play while the kids are in high school.
7. Protect your income with disability insurance
Finally, protect your financial future. If you are sick or injured and unable to work, disability insurance will replace up to 60% or 70% of your lost income, but only for a short period of time.
Most employers offer short-term benefits, but many medium- to large-sized companies offer long-term benefits for up to five years, and sometimes for life, according to America’s Health Insurance Plans, an industry group.
Make sure you are covered. If not, and you can afford it, consider purchasing your own disability insurance. It’s the same story for life insurance. Many employers offer. But if you quit your job, you lose coverage.
If you’re short on cash, opt for a term life insurance policy, which will get you the most coverage for the least amount of money and allow you to lock in low, consistent annual rates over the long term.
– Bankrate James Royal and Brian Baker contributed to update this story.