How to plan for retirement in your 30s

When you’re in your 30s, retirement can seem like a far-off dream. You likely have other financial goals and responsibilities, such as paying off student loans or caring for children. Perhaps you recently purchased your first home, or you’re planning to in the future. However, you’ll still want to prioritize your retirement plans — even if you don’t plan to leave the workforce for decades.

The importance of early retirement planning

Retirement planning involves setting aside money for your golden years. With a strategic retirement plan, you can help ensure you have the money for future goals, whether you plan to travel or spend more time with your grandkids.

When you start to plan for your retirement in your younger years, your money has time to grow. Whether you invest in your company’s 401(k), sign up for an IRA, or stash away cash in a high-interest savings account, your money has the opportunity to compound over time through interest and investment gains.

For example, assume you invest $1,000 at age 30 in your employer’s 401(k), and achieve an average 6% yearly growth rate. By age 65, the $1,000 will be worth $7,686. However, if you invested the same amount at age 50, its value would be $2,397.

In this hypothetical example, by investing earlier your money will accumulate an additional $5,289. That’s pretty impressive! And as you go, you’d add more to the account, meaning the return compounds on itself and grows even more quickly.

Evaluate your current financial situation

Determining how to plan for retirement in your 30s starts with closely evaluating your current financial circumstances.

Assess your net worth

Your net worth is equal to your total assets minus your liabilities. Assets include your bank and investment accounts, plus any equity you have in a property, like your home. You can consider anything you own that has monetary value as an asset.

Your liabilities reflect any debt you owe to creditors or other entities. They include outstanding credit card debts, student loans, and other obligations.

If your liabilities exceed your assets, you have a negative net worth. This isn’t necessarily a bad thing. For instance, a mortgage saddles you with debt that takes years to pay off.

Yet pay it off you will. Your balance will decline, and your house will become a fully-owned asset.

Understand your cash flow

Cash flow is equal to your monthly income minus expenses. A positive cash flow indicates you have leftover money, while a negative cash flow means spending more than you earn.

To calculate cash flow, identify your income sources and monthly expenses. Examine your income and expenses over the prior year, as they likely fluctuate. For instance, you might spend more on gifts during the holiday season or earn extra money from passive investments during certain months. Use your average monthly income and expenses to determine your cash flow.

If you have a negative cash flow or your leftover earnings are minimal, look for ways to increase your income and reduce expenses. Ideally, you want a solid positive cash flow so you can deposit extra cash into your retirement savings account.

Set your retirement goals

A good rule of thumb is to have at least ten times your annual income by the time you reach your ideal retirement age. For instance, if you earn $100,000 annually, your retirement savings might be close to $1,000,000. That probably sounds like a lot, especially if you don’t have much in retirement investments.

However, it’s completely doable — especially if you start the hard work now. (A retirement calculator can help you get started.)

Financial planning experts often recommend the 50/30/20 rule when setting up a budget for savings. The 50/30/20 rule allows you to use 50% of your income for necessary expenses, like rent and groceries, and 30% of your income for discretionary costs. The remaining 20% of your earnings goes to savings.

If saving 20% of your income sounds impossible, do what you can. The 50/30/20 rule is a guideline, but it’s okay not to strictly adhere to it. (You might, for example, want to work on building an emergency fund first.) In the meantime, you can explore how to save money creatively by cutting your expenses or finding new ways to bring in some extra cash.

Strategies for saving for retirement in your 30s

You have a few options when starting a retirement plan at 30. If you work for someone else, they may offer a retirement plan that you can contribute to, such as a 401(k), 403(b), or 457(b). If you’re self-employed, you’ll need to establish your own retirement plan, like an IRA.

Making the most of your employer’s retirement plan

The IRS sets limitations on retirement contributions to employer-sponsored plans. For 2023, the annual limit is $22,500.

In addition to depositing a percentage of your paycheck, your employer may choose to match your contributions up to a certain amount. For example, some employers contribute $0.50 for every dollar you allocate to your retirement plan. Ask your human resources department to determine whether your employer offers 401(k) matching or additional benefits.

Think of an employer’s retirement plan match as a bonus to your salary. Try to maximize your contributions to meet their company match. Otherwise, you’re leaving free money on the table and not taking full advantage of what’s offered.

Exploring individual retirement accounts (IRAs)

If you don’t receive employer-sponsored retirement contributions or want more investment options, one option is to open an individual retirement account (IRA). There are two main types of IRAs: traditional and Roth IRAs.

Traditional IRAs allow you to deposit your before-tax income into a designated account. The money goes into your selected investments and will typically grow over time. Traditional IRAs are a great investment choice for people whose employers don’t offer a retirement plan or who are self-employed. The IRS allows tax deductions for IRAs if your earnings fall under their income limits.

A Roth IRA allows you to invest after-tax money into retirement funds. Like a traditional IRA, you’ll have many investments you can choose between. Once you reach retirement age, you can withdraw your money tax-free. However, it differs from a traditional IRA because it’s not tax-deductible.

The 2023 IRS limitations for IRA contributions are $6,500, or $7,500 for people age 50 or older. You can combine a traditional IRA and a Roth IRA, but your contribution limits for both cannot exceed the IRS limitations.

Invest for retirement

There are other options for saving for retirement. One option is purchasing an annuity. An annuity offers a guaranteed monthly income stream that can start immediately or in retirement.

To buy an annuity, you’ll need to invest a lump sum or make monthly payments for a certain period. You can purchase annuities through some insurance companies.

If you work for a publicly-traded company, your employer may allow you to buy stock in the organization or provide you with shares as part of your benefits package. Owning stock in your company can be an excellent way to build your retirement wealth, especially if the company is growing and continues to be profitable. However, stock prices fluctuate, so pay attention to how much you’ve invested (remember that old adage about eggs in one basket?).

Many financial pros caution that  no more than 10% of your retirement assets should be in your organization’s equity shares.

How to stay on track with your retirement plan

Once you decide on your retirement savings plans, you’ll want to stick with them. Treat your retirement contributions like your mortgage payment: a necessity you must pay monthly. Many experts recommend that you not reduce  your retirement contributions, even if you have a bumpy financial period. Instead, find ways to cut your expenses or earn some extra income.

Many companies will provide annual cost-of-living raises. If you receive a raise, consider dedicating a portion of the increase to your retirement accounts. For instance, if your company increases your pay by 3%, you could increase your retirement contributions by 1.5%.

Sometimes, people decide to leave their jobs for other opportunities. If you find another position in a different company, avoid the temptation to cash out your retirement plan. Not only will you set your retirement savings back, but you’ll also incur additional taxes on the withdrawal.

Instead, consider rolling over your old retirement plan into your new employer’s. If a rollover isn’t possible, you may be able to leave your funds in your existing plan.

While it can be hard to prioritize saving for retirement, especially if you have limited means or are supporting a family, know that your future self will thank you. Once you retire, your regular income will diminish. You’ll instead rely on Social Security and your retirement savings for income.

How to integrate life insurance into your long-term financial plan

Aside from saving for your retirement, consider purchasing a good life insurance policy. A life insurance policy provides immediate financial benefits to your beneficiaries should something happen to you. You can rest easy knowing that your loved ones won’t be left without income to cover immediate costs and support themselves in the coming years.

Purchasing a life insurance policy is an affordable way to help ensure your family has financial protection. Start your journey with a free life insurance quote today.