Any new decade of life brings consternation. But there’s nothing quite like turning 30. It’s become the unofficial mark of adulthood, and it’s when many of life’s most important decisions are made. It’s also when you probably become comfortable with more responsibility.
While many people would like to have used their 20s to set themselves up for smooth sailing in their 30s, few may have actually done so. But if you consider that more than 40% of 20-somethings (and a quarter of your own cohort) have no retirement savings at all, the first penny you save for your future could put you ahead of the pack. As your career advances, your purchasing power rises and your responsibilities grow, it’s a great time to catch up to those who started saving when you may have still been establishing yourself. Here’s how:
Focus on retirement savings
While you might have spent your 20s working long hours and being underpaid, it’s in your 30s that your income could start to see a significant boost. And chances are, you’ll need it. This decade may be the first in which you juggle a long list of competing financial priorities—paying down student debt, building up an emergency fund, buying a home, funding a family (from diapers to college diplomas) and, arguably most important, funding your own life after work.
True, thinking that far down the road can be hard. But a retirement that could last as long as your career is the one major life expense which you won’t be able to borrow. And thanks to compound interest, the sooner you start saving, the less you’ll need to save. So if you haven’t already, it’s time to get going.
If you can contribute to a workplace retirement plan, try to have at least 10% of your pay moved directly out of your paycheck and into your account. You’re less likely to miss the money if you don’t see it, and automatic payroll deduction makes it easy to save more when you get a raise or bonus.
If you’re already adding to a workplace account, consider increasing your contributions or saving more through an individual retirement account (IRA). Because workplace plans like 401(k)s, 403(b)s and 457s may have a limited number of investment options, an IRA can be a way to diversify your holdings further.
Choose your tax treatment
Tax-favored retirement accounts come in two varieties: traditional and Roth. Both kinds of accounts offer a range of investments, and both can grow tax deferred. But which to choose may depend on your tax bracket today—and where you think it will be when you retire.
You fund “traditional” accounts with pretax dollars—for workplace plans, the money goes in before taxes come out of your paycheck; for IRAs, you can deduct some or all of your contributions (depending on your income and filing status) when you file your taxes. The benefit: You can have more money working for you. Also, for workplace plans, contributions lower your taxable income (and annual tax bill), and every dollar you contribute costs you less than a dollar in take-home pay. The downside: Withdrawals are taxable as regular income. So, traditional accounts make more sense if you expect your tax bracket to be lower when you withdraw (in retirement) than it is when you contribute.
By contrast, you fund a Roth account with money on which you’ve already paid income tax. With workplace accounts (if available), this means your contributions cut your take-home pay dollar for dollar. Benefit: You’ll be able to withdraw your money tax free as long as you hold the account at least five years and meet other criteria. In general, the younger you are and the lower your current pay (and tax bracket), the more you should consider a Roth.
Both of kinds accounts are subject to a variety of IRS rules, including potential penalties for withdrawals before age 59½. But this chart outlines their key differences for the 2021 tax year:
Retirement accounts at a glance
Retirement Savings Plan Options
| ||Traditional 401(k), 403(b), 457 ||Roth 401(k), 403(b), 457 ||Traditional IRA ||Roth IRA |
|Pay taxes now? ||No ||Yes ||No ||Yes |
|Pay taxes later? ||Yes ||No ||Yes ||No |
|Max contribution (2021)* ||$19,500 combined* ||$6,000 combined* |
* Those over age 50 can make extra “catch-up” contributions each year, and by age 72 you may have to take required minimum distributions (RMDs) from your accounts, but you don’t have to think about those factors now. Of course, you should discuss your options with your tax advisor.