Your financial planning changes as you age. As you go from working your first job to retiring, you transition from making growth-focused investments to prioritizing liquidity. How do you know when to switch gears? Will life milestones impact your financial plan?
While planning your finances decades in advance can feel daunting—even impossible—you are more than capable. This article will guide you through typical financial milestones and help you understand what to expect as you age.
The Merit of Reassessing Your Finances as You Age
When did you last reassess your investment portfolio, check your retirement plan, or update your insurance coverage? You may be able to adopt a set-it-and-forget-it mentality with a savings account or mutual funds, but you shouldn’t go through life shrugging off financial planning.
For reference, the average adult in the United States spends roughly $18,000 yearly on frivolous purchases. While, hopefully, you have some time before retirement to get serious about your finances — it’s best to start as soon as possible. Why wait?
How Your Financial Obligations Will Change as You Get Older
Your financial decisions in your 20s, 30s, and 40s can set you up for the rest of your life if you play your cards right.
In Your 20s
If you went to college, you start your adult life off in debt. The average student loan debt is $37,338, which can take decades to pay off. You likely have little saved so far at this age, which can make financial planning feel impossible — and unimportant. Still, you need to try.
You get your first job in your field of choice around this time. Although it’s probably on the low end of the salary spectrum, you should put at least 7% of your earnings into your 401(k) in your 20s. If you’re a freelancer or self-employed, contribute to the solo 401(k).
In Your 30s
A lot happens in your 30s. Big life purchases like cars, houses, vacations, and furniture start happening around this time. On top of that, you may have more student loan debt from pursuing a master’s degree.
By this time, you might be married. In the U.S., the average age for marriage was 32 in 2023. You might not consider it a financial commitment, but it is a big one. It affects your taxes and retirement plan contributions. You may even become responsible for your spouse’s debt.
Soon after that life milestone, you may start considering starting a family. The average cost of raising one child totals more than $310,600, averaging roughly $17,000 annually. You must plan for expenses like child care, housing, extracurriculars, and college education.
In Your 40s
By 40, you’re stuck with the budgeting and spending habits you formed decades ago — which can be problematic if you haven’t been the most frugal. Plus, despite retirement growing closer by the day, you might have a lot of debt.
A house is one of the most significant purchases you’ll make in your life. On top of making monthly mortgage payments, you are financially responsible for repairs, property taxes, utilities, and home insurance — not to mention the down payment and closing costs.
Divorce is another variable that can force you to adjust your financial plan in your 40s. Unless you have a prenup or a postnup, untangling your finances will be messy. Plus, if you earn more than your ex-spouse, you may have to pay spousal support or alimony once a month.
Prepare for Changes When Approaching Retirement
As you progress from your early career to retirement, your financial planning initiatives, obligations, typical expenses, and saving capabilities will change.
In Your 50s
Your 50s may be your last legitimate chance to save for retirement and wipe away your debt. Hopefully, you have taken your finances seriously, stayed out of debt, and saved well. Now, you may have to pay for cars, computers, and college tuition if you have kids. Paying for your aging parents’ care is another common — but often overlooked — expense.
You reach your peak earning potential in your 50s, so you should be able to handle these expenses. However, a career change can change things. On average, you will change jobs 1.9 times from age 45 to 52.
If you become a contractor or freelancer, you will lose employer-matched retirement contributions and employer-sponsored health insurance. Even if you find cheap health care and put money into a solo 401(k), you’ll have to put your saving strategy on pause temporarily.
In Your 60s
With the kids moving out, your spending habits will change. In your 60s, your focus should be on managing health care costs and estate planning as you transition to a fixed income and dip into your savings.
According to the U.S. Federal Reserve, 72% of adults have some retirement savings. However, just 41% of those who were at least 60 said their retirement financial plans were on track. You can start claiming your benefits at 62, so this response is concerning.
In Your 70s
If you turned 62 in 2024, your full retirement age would be 67. You’d get $2,000 monthly (or less). If you start receiving benefits at 62 instead, you would get just $1,400 — a permanent 30% reduction. Waiting until 70 would get you $2,480, a 77% increase.
You may be ready to get social security as soon as you become eligible. However, waiting will permanently increase your monthly benefit amount. Moreover, if you pass away before your spouse, they will get higher survivor protection for the rest of their life.
What Should Your Priorities Be as You Get Older?
As you approach retirement, you should ensure you’ll be comfortable on a fixed income. An annuity is a great way to do that. You pay an insurer a lump sum or periodic payments. In return, you get a guaranteed cash flow for a predetermined period — often for the rest of your life.
The money you invest grows on a tax-deferred basis. You may be tempted to cash in early, but selling annuities triggers capital gains taxes — the amount you owe on profits made from a sale. Plus, you pay a substantial fee if you withdraw funds during the surrender period. Generally, you should only sell to cover a significant financial emergency or huge, unexpected debt.
Your second priority should be keeping your healthcare costs down. You can sign up for Medicare medical insurance just before you reach 65. Depending on your work history, it could guarantee you pay nothing for care. Remember to sign up on time to avoid paying late enrollment penalties.
The older you get, the more health likely health issues become. If you can’t work because of a medical problem, enroll in Social Security Disability Insurance. There is a five-month period, according to the U.S. Social Security Administration. Once approved, you receive monthly benefits. They eventually convert to retirement benefits.
Shifting Away from Growth-Focused Investments
As you near retirement, you may need to shift away from growth-focused investments like stocks toward conservative, income-generating assets like savings accounts or real estate. You don’t want to risk your money at this stage. Besides, you will want liquidity going forward. Having your funds tied up and paying withdrawal fees is not ideal in your 60s onward.
Ensuring your estate planning is up to date should be a priority for you. Who will distribute your assets if you become incapacitated or pass away? Will your children inherit your debt? Ideally, you should reassess your plan after every significant life event. However, it’s never too late to figure things out.
One survey shows roughly 50% of people worry about their debt affecting their children. If you co-signed a loan for them, are a joint owner on a bank account, pass down property with a mortgage, or are in a state with filial responsibility laws, they may become financially responsible for you as you age.
Filial responsibility means an adult child is legally financially responsible for their parents. As of 2024, 29 states have these laws on the books, and 22 do not. They are rarely enforced, but the state may go after your children to recover costs if you lack health care or are too poor to live independently. Consequences for noncompliance include fines, civil suits, and even jail time.
How to Remain Financially Secure Throughout Your Life
You need to be proactive. Manage your credit card and student loan debt quickly before the interest becomes too high. Use the debt avalanche strategy, where high-interest loans take priority. Pay off the principal every time payments are due if you want to see your total amount owed shrink.
Another good rule of thumb for long-term financial planning is creating an emergency fund as soon as possible. This way, you’ll be prepared when life takes an unexpected turn. Whether you get hit with vet bills, your car breaks down, or you miss a week of work because of an illness, your long-term financial plans won’t derail.
If you don’t know where to start, you aren’t alone — only four in 10 Americans have a budget. Write down what you spend in a month. If you can’t put 10% to 30% of your paycheck into a savings account each month, try to cut back on unnecessary expenses.
If you have money left over after budgeting for expenses and tucking some into savings, invest strategically with the help of a fiduciary — a professional who is legally and ethically obligated to act in your best interest. When the time comes to transition from growth-focused investments to income-generating assets, they can guide you.
One commonly overlooked tip for remaining financially secure in old age is safeguarding your savings from scammers. Older adults are one of the most at-risk groups for fraud. According to the U.S. Federal Trade Commission, they collectively lost $1.9 billion to fraud in 2023 alone. Accounting for indirect costs, the figure may be as high as $61.5 billion.
It’s Never Too Early to Start Financial Planning for Retirement
Whether you want to retire at 55 or 70, it’s never too early to start financial planning. The decisions you make now can help you live a comfortable, debt-free life for decades — and safeguard your estate if you have children or causes you want to give the rest of your wealth to.
Featured Image Credit: Photo by Pixabay; Pexels
