Retirement Planning Strategies For Your 30s

In our last article, we focused on the importance of getting an early start on retirement saving and investing. Ideally, this should start as soon as you’ve landed your first professional job in your 20s. This gives you the most opportunity to benefit from the power of compounding over the long term.

Balancing Financial Goals

For many people, the 20s represent a time when they are just starting out in their careers and their earning potential is limited. The 30s, however, often represent a time of greater earning potential as individuals start to advance in their careers and move up the corporate ladder.

At the same time, though, they may also have started a family and assumed more financial responsibilities like a mortgage, life insurance, multiple car payments, and all of the expenses involved in raising children. Therefore, a common retirement planning challenge at this stage of life is balancing the goals of meeting growing financial responsibilities like these while also maintaining consistency in retirement savings.

Ideally, this is the life stage where individuals should be gradually increasing the amount of money they are contributing to their retirement plans. One way to accomplish this is by making a commitment to save a certain percentage of income for retirement, instead of a fixed dollar amount. This way, contributions to retirement accounts will increase along with income.

For example, suppose an individual decided at age 25 to contribute 10 percent of his pre-tax income into his Individual Retirement Account. At the time, his annual salary was $30,000, so he started out contributing $3,000 a year (or $250 a month) into his IRA.

Today he is 35 years old, and his annual salary has increased gradually to a current level of $50,000. By following this strategy, he would have increased his IRA contributions each time his salary rose and be contributing $5,000 a year (or $416 a month) to his IRA now, which is the annual IRA contribution limit in 2012 for anyone under 50 years of age.

Setting Financial Priorities

As individuals in their 30s begin to advance in their careers and earn more money, it can be easy for this money to be swallowed up in the growing expenses they face. They may also desire to spend money on some luxuries they may not have been able to afford earlier in life — things like nice vacations, fancy cars and boats, and dinners at expensive restaurants.

This is understandable, and there’s nothing inherently wrong with spending money on these kinds of things. But planning for a financially secure retirement that’s looming ever closer requires setting some financial priorities.

One of these should be maintaining consistency in making retirement plan contributions and increasing the amount of these contributions as income rises, as noted above. Eventually, you may reach the annual contribution limits allowed by law for qualified retirement plans like IRAs and employer-sponsored 401(k) plans.

In this instance, you may want to consider alternate retirement planning vehicles that feature higher contribution limits (or no limits at all). We’ll discuss these in more detail in our next article.

In the next article, we will take a detailed look at retirement planning strategies for individuals in their 40s.