In a perfect world, retiring comfortably would follow a simple game plan. We'd work for roughly four decades, save diligently, invest for the long-term, and retire with more than enough to last throughout our lifetime. Rarely, though, does life seem to work this way. More often than not life throws monkey wrenches into our retirement plans, causing us to constantly rethink and revise our strategies.
What can make things even tougher is that your retirement strategy can completely differ from someone else based on your age. What a 60-year-old readying to retire is doing for himself is more than likely going to be far different from what a 30-year-old is doing to prepare for her retirement in three-plus decades. In fact, with time being the friend of the young investor and the foe of the older investor, you could argue that sticking to your retirement plan is even more important during your 30s than in just about any other timeframe.
The perfect retirement strategy for people in their 30s
With this in mind, today we're going to look at what the perfect retirement strategy might look like for people in their 30s.
1. Formulate and stick to a budget/build an emergency fund
The biggest issue most people in their 30s have -- and I speak from experience on this one as a thirtysomething -- is the "I'll save later" attitude. Younger folks have a harder time setting money aside for the future because they prefer short-term gratifications. One reason for this is the likelihood that they aren't keeping a detailed monthly budget.
Based on data from Gallup in 2013, only 32% of American households keep a detailed monthly budget, which means some 68% of respondents probably don't have a good grasp on their cash flow. If consumers don't understand how their cash is flowing out of their checking account, they'll have a difficult time optimizing their ability to build an emergency fund and saving for retirement. The solution is fairly obvious: Thirtysomethings need to be working with a monthly budget.
Unlike baby boomers who used to do their monthly budget by hand, people in their 30s grew up in a world filled with technology, meaning they can easily utilize online budgeting software to develop a saving plan with nothing more than a few clicks. Probably the biggest challenge for people in their 30s is remaining committed to their savings plan. There are three easy solutions to that.
First, ensure that you surround yourself with like-minded people that have similar goals. This means making sure your entire household (including your kids) are sticking to the household budget, too. Secondly, consider automatically withdrawing money from your checking account to a savings or investment account each week or month to hold yourself accountable. Finally, consider using cash for purchases instead of credit, because handing over your tangible, hard-earned cash will make you think twice about your discretionary purchases.
2. Think long-term and target growth
The second thing people in their 30s must do is consider their investments for the long term and not just as trades. Studies have consistently shown that trying to time your investments isn't as profitable as holding them for a long period of time.
For example, J.P. Morgan analyzed the performance of the S&P 500 over a 20-year period between Jan. 3, 1995, and Dec. 31, 2014, using data from Lipper. Despite there being two massive recessions -- the dot-com bubble and Great Recession -- during this 20-year period, investors who'd purchased the tracking index for the S&P 500 and held all 20 years would have gained 555%. By comparison, if you'd missed a little more than 30 of the best days over this 20-year period, this 555% gain would have been completely wiped out. And, as JPMorgan's data showed, a majority of the best trading days also occurred within two weeks of the S&P 500's worst trading days. Timing the market with any consistency just isn't possible.
Instead, your game plan should include picking out individual stocks, mutual funds, and other assets that you can buy and hold for a long period of time. Additionally, since you have time on your side and mistakes can be easily erased with one or two big winners, people in their 30s can choose to be a bit more aggressive with their investments. I'd suggest focusing on growth stocks that offer potentially long-term competitive advantages over their peers.
3. Use tax-advantaged tools to your advantage
People in their 30s also need to be smart about how they invest for their future. Opening a brokerage account and investing money is a good start, but it doesn't really offer much in the way of tax benefits unless you hold your stocks over the long term (366 days or more) and take advantage of long-term capital-gains taxes. Instead, people in their 30s should be focused on retirement tools that offer them tax advantages.
In one corner we have Traditional IRAs and employer-sponsored 401(k)s, which allow you to invest pre-tax money into an account where your taxable gains will be deferred until you begin taking withdrawals in retirement. These accounts can help lower your current-year tax liability, and in the case of a 401(k), you could even receive a match from your employer up to a certain percentage of your annual contribution.
The creme de la creme of tax-advantaged retirement accounts, though, is the Roth IRA, which allows your investment gains to grow completely tax-free for life, assuming you make no unqualified withdrawals. This means no upfront tax deductions, but perhaps an even bigger tax break when you retire. A Roth IRA can be a smart way of making your nest egg stretch even longer once you retire.
Additionally, a Roth offers more financial flexibility than a Traditional IRA, since there are no age limits on who can contribute, and no minimum distribution requirements.
Long story short: People in their 30s should be using tax-savvy plans to get the most out of their nest egg.
4. Get health insurance
A fourth thing people in their 30s need to do is get health insurance. It might seem odd to suggest that generally healthier young adults should purchase health insurance, but one of the easiest ways peoples' savings can be derailed is with an unexpected medical expense. According to a recently released study from Northwestern Mutual, 34% of Americans responded that having an unplanned medical expense because of illness is one of their greatest financial anxieties. Plus, having health insurance will ensure that you avoid paying a penalty under the Affordable Care Act for not purchasing health insurance, known as the Shared Responsibility Payment.
However, people in their 30s shouldn't just buy health insurance to have health insurance. You should be examining each plan to see which one is tailored to your individual needs. The plan with the best value for you may not always be the cheapest.
Also, make sure you aren't automatically re-enrolling in the same plan from one year to the next. Your insurer can make changes to your coverage and network each year, which could also include premium price changes. Putting in some time each year to examine your health insurance options should keep you from being devastated by an unexpected medical expense and ensure you get the best bang for your buck.
5. Be debt-savvy
The final component to the perfect retirement strategy for people in their 30s is to be mindful of their debt.
According to a recently released study from the Urban Institute, the percentage of adults aged 65 and up that were carrying debt rose to 44% in 2012 from 30% in 1998. The median amount of debt, per the study, was $24,500 as of 2012. What's more, nearly a quarter of retirees still have mortgage debt. Carrying around large amounts of debt can reduce your ability to save during your working years, and it can eat up your retirement benefits during your golden years when you no longer have wage income. This means being smart about your debt levels begins long before you retire.
Having a working budget will go a long way to helping keep your debt levels under control. Similarly, using cash instead of credit can help reduce your discretionary purchases that you may wind up regretting later.
It's also a good idea for people in their 30s to focus on paying off their highest-interest credit cards first. It could even be worth transferring some, or all, of your credit balances to a 12- or 18-month 0% APR card to really maximize your ability to pay down your principal. Don't forget, having a good credit score can also lead to more favorable lending terms if you take out a mortgage on a home.
Ultimately, this perfect retirement strategy is nothing more than a guide for you to develop a plan that fits your unique needs. The important step is that you develop a plan in the first place so you don't wind up worrying about whether you can retire comfortably three decades from now.