If you are one of the millions of Americans who have their money tucked away in a retirement account, you’ve likely caught a glimpse of the retirement planning meter. This tool helps investors gauge whether they are on track to cover their retirement expenses or if adjustments need to be made to help them achieve their financial goals. We’ve become so familiar with these retirement meters, which help us plan for the future, that we often forget about the financial milestones we may want to meet in the present. 

Ultimately, the financial milestones we achieve during our 20s, 30s, 40s, and 50s, will help ensure that we are on track to cover at least 95% of our living expenses in retirement, but we rarely break down those age groups and attach them to real life financial goals. No matter where you are on the retirement meter, it’s important that you also take stock of where you are today– considering age, stage, or situation–and thoughtfully plan for the next financial milestones. 

We cover the top financial milestones you may want to consider at each stage of your life. 

In Your 20s

Building an Emergency Fund 

Experts estimate that you should have between three to six months worth of expenses put away in your emergency fund. In this early stage of life, you may be starting your emergency fund at ground zero. 

A good way to back into how much you’ll need to tuck away into your emergency fund is by taking your average monthly expenses, like rent or mortgage, utilities, car loan, etc., and multiply it by the desired number of months you’ll want available in your emergency fund. So, if your monthly expenses are $4,000 and you want to have six months of expenses liquid, you’ll need $24,000 in your emergency fund. 

Remember to also incorporate any available liquid savings into the equation and account for any nuances that are job or situation specific that may require more than the recommended six months.  

Pay off High-Interest Debt

High interest debt refers to any loan that has a higher than most interest rate. For many twenty year olds, this can come in the form of student loans, first time credit cards, car payments, or even mortgages. 

The US Government recommends that you pay off debt with the highest interest rate first, paying as much as you can toward the debt each month until your balance is zero. Try approaches like the snowball method, paying over the monthly minimum, or making two payments each month to help pay down debt. 

Establish Good Credit Habits

Average first-time credit card holders range from age 18-20, though parents or guardians may include their children as an authorized user to help build healthy credit. During this stage of life, having a credit limit may be tempting, which is why developing good credit habits is crucial to maintaining good credit. 

Ensure you remain in good standing with creditors by:

  • Paying your bills on time
  • Keeping your credit utilization low
  • Avoiding maxing out credit cards
  • Regularly checking your credit report
  • Using credit cards responsibly
  • Building a diverse credit portfolio
  • Avoiding excessive credit applications

Adopting these habits can help build your credit, earn you a positive credit score, and improve your overall financial wellness.

Save for Retirement 

There’s that 10 letter word again. Alas, we cannot escape retirement planning as we enter our 20s. Most 20 year olds are just kicking off their careers or moving towards a full-time work schedule. With a newly bolstered income, it’s important to set aside a portion of those dollars to a retirement account. 

How and where you establish your retirement fund will depend on a few factors. You may work for an employer that offers a company sponsored 401(k) or you may be self-employed and contributions would be made to a SEP IRA, SIMPLE IRA, or Solo 401(k). If an employer plan is unavailable to you, you can still save by opening your own traditional individual retirement account (IRA) or a Roth IRA account at a local brokerage. We examine the different types of retirement plans here and qualifiers for each. 

Regardless of where your money is kept, kicking off a retirement account is a step in the right direction. 

In Yours 30s

Bolster Your Retirement Funds 

Speaking of retirement, as you waltz into your 30s now is the perfect time to examine your retirement funds and assess whether you are on target, in good shape, or if your account is in need of a little attention. 

You likely aren’t making the same amount of money you did in your 20s, so now is the time to up your retirement contributions with any pay increase. If you aren’t doing so already, be sure to take advantage of employer contributions by contributing enough to maximize the employer match. This is essentially free money and an enormous company-sponsored perk. 

This is also a great time to review and adjust your investments. Is your risk tolerance aligned with your investment and retirement goals? How’s your overall portfolio performance from a quarterly or yearly perspective? If you aren’t sure where to begin with assessing your investments, looping in a qualified financial advisor is a great way to help ensure you’re on the right track. 

Developing a Budget

Now this certainly could be a financial milestone achieved in your 20s, but as you learn more about your income, expenses, and financial habits, developing and sticking to a clearly defined budget is one of the most important aspects of financial planning. 

There are so many great tools to help you create a budget personalized to your needs, like Mint or Rocket Money. These apps will help break down your expenses into categories, like food & beverage, utilities, and entertainment, and share insight into where the majority of your income is spent. 

If you’re more of a pen and paper person, you can create a budget in just a few steps:

  1. Figure out your monthly income
  2. Detail all of your monthly expenses
  3. Calculate the remaining balance after all expenses have been deducted from the income

You’ll also want to review and assess your monthly budget regularly to ensure you remain on track and in line to achieve your financial goals. 

Planning for a Home

In 2022, the average age of first-time home buyers was 36. 29% of those homebuyers admitted that saving for a down payment was the most difficult part of buying a home. Ideally, home buyers will want to put down 20% or more of the home price to avoid paying private mortgage insurance (PMI). 

Still, if the average home price in 2022 was $348,000 that means you’ll want to come up with a cool $70,000 for a down payment. How can you save up that much cash to achieve this financial milestone? Consider adjustments to your existing expenses, like cutting unnecessary spending, making a down payment specific savings category in your monthly budget, paying off debt, and investigating first-time home buyer assistance programs or grants. 

Protecting Yourself with Insurance 

Part of planning for the future is protecting yourself in the present. Insurance is one way to ensure your expenses are covered in the event of an accident. 

There are several different types of insurance to consider, like:

  • Health insurance 
  • Life insurance
  • Car insurance
  • Disability insurance
  • Homeowners or renters insurance
  • Long-term care insurance

Some, like health insurance and car insurance, are required depending on the state you live in, while others, like life insurance and disability insurance, are entirely optional. At the crux of the matter, insurance is a way to transfer the financial impact of a high-severity, low frequency event to someone else (i.e., the insurance company). Insurance helps you meet your financial obligations in the case of an unexpected event like a disaster or accident.

In Your 40s

Continue to Assess Your Retirement 

You didn’t think we wouldn’t mention retirement again, did you? Retirement reigns supreme of the financial milestones, so it’s not uncommon to check-in on your retirement progress at each stage of life. 

Continue to increase retirement contributions with any income adjustments and check-in with your financial advisor to review your investment portfolio annually. This is also a good time to review your risk exposure and make appropriate adjustments. 

Education Planning 

If you have children, you may want to consider planning for their education as you enter your 40s. A college education can be expensive, so starting an education plan now will help them avoid high-interest debt later in life. 

529 plans are the most popular education plans, as they allow for tax-free growth as long as the funds are withdrawn to pay for qualified educational expenses. They also do not have an annual contribution limit, which allows family members to fund the account without reaching a yearly cap. 

Investing for Wealth 

With so many financial milestones now under your belt, it’s time to focus on building your wealth. Before you begin investing, it’s important to seek professional guidance to ensure your goals are in line with your investments, risk tolerance, and financial circumstances. 

A financial advisor with investment management experience can help you establish short-term and long-term investment goals, identify your liquidity needs, balance risk and return, and appropriately diversify to achieve financial success. 

Update Estate Plan Documents 

If you don’t already have an estate plan, now is the time. An estate plan outlines your wishes and ensures for a smooth transition of your assets and management of affairs following incapacity or death. 

Consider working with an estate planning attorney to help organize your estate and important documents like:

  • Last will and testament
  • Power of attorney
  • Advance healthcare directive
  • Revocable trust
  • Beneficiary designations
  • Letter of intent

Organizing these documents will help your loved ones avoid probate in the future. 

In Your 50s

Max out Retirement Contributions

Kick off your 50s by maxing out your retirement contributions. In 2023, the normal contribution limit for employees who participate in 401(k), 403(b), and most 457 plans is $22,500. The annual contribution to an IRA is $6,500. 

However, now that you’re over 50, the IRS allows you to make catch-up contributions. For your 401(k), you may be able to contribute an additional $7,500, for a total possible contribution amount of $30,000. The government also allows you to contribute an extra $1,000 to your IRA, meaning that your annual contribution can be as much as $7,500.

Evaluate Long-Term Care and Health Coverage

You may have opted-out of long-term care or health insurance in your 30s, but now is the time to reassess. As you get older, the need for quality health insurance becomes much more necessary, as routine exams can help screen for potential health concerns. 

Health insurance, if not offered through an employer, can be a large expense. When searching for health care coverage, consider factors like premium costs, deductibles, copayments, coverage limits, prescription coverage, and the network of providers available. 

If you already are covered by health insurance, you may want to consider long-term care insurance. This type of insurance coverage covers costs associated with long-term care services, like nursing homes, assisted living facilities, or medical assistance for daily living activities. When searching for this type of insurance consider eligibility, coverage types, coverage limits, premiums, triggers, and inflation protection. Generally, the sweet spot for purchasing long-term care is in your 50s, as waiting until you’re older means an increase in premiums or a higher chance of your long-term application getting denied. 

Plan for a Smooth Retirement

You’re almost there! Retirement is on the horizon, so it’s time to review your retirement plan to ensure your circumstances and financial situation are aligned with your retirement goals. 

When evaluating your retirement readiness, carefully analyze each of these areas:

  • Calculate retirement income
  • Estimate retirement expenses
  • Evaluate retirement savings
  • Assess outstanding debt
  • Project retirement budget

Each of these factors will help determine when you are financially ready to retire and whether adjustments should be made now in order to fulfill your retirement goals.

In Your 60s and Beyond

Take Advantage of Catch-Up Contributions

Remember that adults 50 years or older can take advantage of catch-up contributions, additional money that can be contributed to certain retirement savings accounts above the annual contribution limit. Continue taking advantage of these extra contribution limits.

Explore Retirement Income Sources 

Just because you are retired doesn’t mean you won’t have a stream of income. 

The most widely known source of income post-retirement is Social Security. This government-based program takes a portion of your contributions as a worker throughout the entirety of your career and dispurses it to you once you’ve reached a certain age. Your social security income is based on how much you earned throughout your working career, so those with more working years under their belt will earn more social security benefits over time. Full retirement age, according to the Social Security Administration, is 67, though you can apply for a permanently reduced benefit at age 62. 

Some may qualify for a pension plan, though these are typically public sector workers or those within certain industries. These plans offer a fixed, regular income to retirees based on your salary and years of service. 

You may also want to explore other income avenues like annuities, part-time work, or investment properties. 

Prepare for Medicare

Making sure your health insurance is taken care of is a key component of your retirement. Federal programs, such as Medicare, have important enrollment periods in your 60s that you need to be aware of.  Although you might not retire until after age 65, it’s wise to be aware of the basics of Medicare and the enrollment periods.  

Medicare Part A is the government-sponsored healthcare for in-hospital coverage. Their enrollment period begins 3 months before you turn 65 and ends 3 months after you turn 65.  If you miss that window, you can enroll during the general enrollment period the following year from January to March 31.  However, most people will enroll in Medicare Part A at age 65 because there is no cost in premiums.

Medicare Part B is sponsored healthcare for outpatient coverage. You can begin enrolling at age 65 during the same enrollment period as A. However, most people who work past age 65 will elect to keep their employer insurance and delay signing up until when they retire and no longer have employer coverage.  This can depend on whether your employer has more than 20 employees; with smaller companies it might be advised to enroll in Medicare Part B even while still covered by your employer.  

Medicare Part D covers prescription drugs. You can enroll when enrolling in Part A and Part B; most people will enroll in Part D after their employer coverage has expired. 

It is important to be aware of these Medicare deadlines because delaying enrollment can incur penalties. For Part A, you may have to pay a penalty of an extra 10% for twice the number of years you did not sign up.  For Part B, each 12 month period you delay enrollment will result in a 10% penalty for as long as you have Medicare. 

Even if you are working into your 60s, it is important to understand your Medicare options so that you can avoid having to pay penalties.  The various timing and deadlines with Medicare can be confusing, so be sure to do your research in order to best maximize your benefits or enlist the help of a professional.

Achieving financial success simply cannot be done without a plan. Financial milestones can help build a solid financial foundation and set you up for a secure future. It is important to remember that everyone’s financial situation is unique, so be sure to set goals and objectives that fit your needs and circumstances. 

Leaning on the expertise of a financial advisor is also recommended, no matter what age or stage of life. Prudent Investors works with individuals and families to actively manage investments and plan for your financial future through a personalized strategy created by your financial goals. Whether you are focused on retirement or wealth management, we can help make the most of your financial planning experience. We invite you to connect with us to learn more. 

Investment advice through Prudent Investors Network, Inc., an SEC-registered investment advisor. This blog is general communication being provided for informational purposes only. This information is in no way a solicitation or offer to sell securities or investment advisory services. It is educational in nature and not to be taken as advice or a recommendation for any specific investment product or investment strategy. This does not contain sufficient information to support an investment decision. Any investment or investment strategy mentioned may not be suitable for all investors or in their best interest. Statistical information, quotes, charts, references to articles or any other quoted statement or statements regarding market or other financial information is obtained from sources which we believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All rights are reserved. No part of this blog including text, graphics, et al, may be reproduced or copied in any format, electronic, print, et al, without written consent from Prudent Investors. Prudent Investors does not provide legal or tax advice. Please be advised to consult with your investment advisor, attorney or tax professional before making any investment decisions.

Jeremy Lau

Jeremy L. Lau serves as Chief Executive Officer. He teaches the Investment Management course for California State University, Fullerton’s Trustee Certification Program and frequently speaks on fiduciary investing to attorneys and fiduciaries across various associations. Before joining Prudent Investors, he worked as an Executive Director in investment banking in Tokyo and Hong Kong for Deutsche Bank AG and UBS AG in structured credit and convertible bonds. He graduated in Accounting (with Honors distinction) from Brigham Young University and has earned the right to use the Chartered Financial Analyst (CFA®) and Certified Financial Planner (CFP®) designations.