While it’s easy to see how savings are an important part of financial well-being, it can be tricky to figure out exactly how much to save in each phase of your life. So, we’re breaking it down and providing practical guidelines to help you nail the numbers for your 30s, 40s and 50s.
Hard-and-fast rules or guiding principles?
It’s important to note these tips are best used as guidelines, not hard-and-fast rules. After all, it’s impossible to 100% accurately project your future financial needs; the math is unique for each individual. For example, maybe you plan to work past 62, the traditional early “retirement age” at which you could first start to receive Social Security benefits. Plus, everyone’s retirement looks different in terms of lifestyle expectations and family obligations. Kids can change the savings equation, too, depending on if you have children, how many you have, and if you plan to cover education expenses.
We all have to balance our present needs with our future plans. Setting aside money for retirement may not make sense if you’re currently managing large expenses, such as an expensive medical issue. Regardless of your savings goals or current situation, experts advise that doing something is always better than doing nothing.
With that in mind, here are several important savings considerations for each phase of your life.
At every age: An emergency fund
Before you start setting aside money for retirement or a down payment on a dream home, it’s important to make sure you have an adequate emergency fund. This fund is meant to help you navigate unexpected expenses, like a job loss, broken water heater or trip to the hospital — without having to turn to a high interest rate credit card, falling behind on other payments, or drastically cutting back on regular expenses.
Generally, your emergency fund should hold a bare minimum of two weeks’ pay or $1,000, whichever is greater; and ideally, the fund will be enough to cover three to six months’ worth of household expenses. You can use an online calculator to estimate a more exact figure. The amount will vary in your 30s, 40s and 50s, but the concept remains the same: Have enough set aside to cover an emergency event.
In your 30s
Retirement: Your 20s and 30s are the most powerful time to save for retirement, since dollars you sock away now have more time to grow and generate long-term wealth. Some experts suggest you should have an amount equal to your current salary saved for retirement by the time you hit age 30. For example, if you’re earning $40,000 annually at age 30, you should already have $40,000 saved for retirement, thanks to what you set aside during your 20s. By the time you’re 35, the recommended amount is two times your salary.
For most people, this means directing about 15% of income every year toward retirement, starting in your early 20s. Ideally, you’ll use a tax-advantaged retirement plan, such as 401(k) or IRA.
Buying a home: According to a 2017 survey, the median age for first-time home buyers in the U.S. is 32. To prepare for this financial milestone, you’ll likely need to save up for a down payment.
How much will you need? It used to be conventional wisdom that buyers had to put down at least 20% of the home’s value to get a mortgage — but that figure is no longer accurate. More than 70% of first-time home buyers who used financing have made down payments of less than 20% in recent years. In fact, 60% of first-time home buyers have made a down payment of 6% or less. The median home value in the U.S. is about $213,000, so a down payment of 6% would equal $12,780. (Keep in mind that home values vary significantly throughout the country, so the amount you need to save could be higher or lower.)
Bonus tip: If you’re struggling to save in your 30s because of high-interest-rate debt or multiple student loans, you may want to consider debt consolidation. Debt consolidation, often done by taking out a new personal loan, can lower your rates and/or reduce your monthly payments — freeing up more money in your budget to dedicate toward savings.
In your 40s
Retirement: By the time you reach age 40, the expert recommendation is to have three times your annual salary set aside, and four times by age 45.
Paying for your kids’ education: If you have children and are planning to cover some or all of their college costs, it’s imperative to save early — and smart. Many people choose to use 529 plans, which come with major tax advantages. You can choose between a prepaid tuition plan, which lets the account holder buy tuition credits, or a college savings plan, which is an investment account used to save for future qualified expenses, including room and board.
How much will you need to save? College costs vary widely, depending if you are paying in-state tuition at a public college (about $9,400 each year) or a private college (about $32,400). An online college savings calculator can help you figure out how much to save each month based on various assumptions, like your child’s age and what percentage of costs you’re aiming to cover.
In your 50s
Retirement: By the time you reach age 50, the expert recommendation is to have six times your annual salary set aside, and seven times by age 55.
Care for aging parents, partners and yourself: According to a study by the Urban Institute, an American turning 65 today will incur an average of $138,000 in future long-term service and support costs — and families will pay about half of the costs themselves out-of-pocket (equaling about $69,000). Many people choose to buy additional insurance or set aside savings to cover future expenses. A simple savings calculator can help you analyze different ways to save for long-term care.