What Are You Saving For Right Now?
Each decade in your life comes with different goals, and while the best things in life may be free, some of the other best things in life aren't quite that cheap. Having a baby, buying a house, or retiring early... all of these require a savings plan. Here we'll look at some of the most common savings goals in each decade of your life, and some of the issues you might run into during each one.
Saving in Your 30s
Possible goal: Saving for a house. It’s smart to keep this money in a low-risk account like an online high-yield savings account or a short-term CD ladder. It’s very easy to overspend in this period due to the cost of having children. A good strategy is to calculate the difference between what you currently pay in rent and what you estimate for your home expenses (don’t forget property tax, insurance, and 1% of the home value for annual repair expenses). Then save that difference in a separate account and see if you can stomach spending that much.
Saving in Your 40s
Possible goal: Saving for kids’ college. While it’s important to start a 529 as soon as possible, it’s more important to save for retirement in this time period. Don’t skimp out on 401(k) contributions to save in a 529 – especially if you lose your employer match. You can borrow money for college, but you can’t borrow money for retirement! We like the Utah 529 with its low-cost funds from Vanguard and Dimensional Fund Advisors. And if you want to supercharge the savings in a 529, you can do a 5-year contribution upfront and put $75k from each parent into the account right away. The biggest issue we see wrecking financial plans in this time period? Divorce. Marriage counseling could be the best investment you make in your forties.
Saving in Your 50s
Possible goal: Saving for retirement. You can start supercharging your savings for retirement in your 50s. Currently (in 2021) you can save $19,500 into your 401(k), but if you’re over 50 you can also toss in an extra $6,500. Depending on your income level, you might also be able to save an extra $6,000 into an IRA (plus an extra $1,000 if you’re 50 or older!) And if you have a high deductible health care plan, you will want to stuff another $3,600 into an HSA (plus an extra $1k if you’re 55+). That’s a lot of savings, but you will be in the peak of your career at this point, so if you haven’t tucked away enough for retirement, it’s time to get on it!
Saving in Your 60s
Possible goal: Saving for health care. This may be the one savings goal that nobody wants to think about, but it’s important to have a plan in case of a health event since around 70% of people will need long term care at some point in their life. Long term care can cost anywhere from $2-10k a month, depending on whether it’s in-home care, assisted living, or skilled nursing, and also depending on where you live: https://www.genworth.com/aging-and-you/finances/cost-of-care.html
An HSA can help with this, but long-term care insurance is expensive, so we often see people self-insure with their own investments. Oftentimes, having a lot of home equity is a good backup plan – if you end up needing to move out to a nursing home, a reverse mortgage can help pay the bills. It’s also a good idea in this decade to get a HELOC – a home equity line of credit – while you’re still working. Even if you don’t use it, it’ll be a good backup plan in case of a large unforeseen expense.
Saving Beyond Retirement
Once you’ve saved enough for retirement, most of our clients start thinking about their legacy goals – whether it’s leaving an inheritance to their family or a large charitable donation. During the early years of retirement, it’s a good idea to do some intense tax planning for these future goals.
Early in retirement, your income usually drops to almost nothing, along with your tax bracket. This is a good time to do some Roth conversions from your IRAs or harvest capital gains from your investments at a 0% capital gains tax rate. Once you claim Social Security and start taking required minimum distributions from your retirement accounts, your income shoots back up and it’s much harder to save money through tax planning. These are what we call the bridge years, and if you only ever hire a financial advisor for a few years, these are the years to do it in since there are a lot of big decisions that can impact your future savings.
Later on, for charitably inclined people, using qualified charitable distributions from your IRA in place of RMDs can help ease the tax burden. The gift exemption is high – currently over $11 million – so you probably won’t worry about having to pay gift tax, but know that you shouldn’t do things like give away a house or appreciated stock to your heirs during your lifetime. If you do that before you pass, they will miss out on the huge tax break known as the “step-up in basis”. Most of the planning in this decade is less about saving money and more about managing the savings you have, to make sure they last long enough for you and your heirs to enjoy.
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