What you do in your 20s is often far different than how you handle the same things in your 50s and 60s. From physical activities to leisurely preferences, you adapt as you get older. And the same is true for financial strategies.
When you’re first starting out, your income is at its lowest and the idea of retirement is a lifetime away. By your mid-40s, your earnings (and expenses) are usually higher, and retirement seems too close to believe. No matter what stage of life you are currently in, you can set a plan that leads to long-term security.
The Mathematical Cost of Waiting
Before we explore the individual stages, it’s important to look at the power of compounding and the consequences of delaying. In the world of money, time is a multiplier.
The earlier you start, the less you have to contribute your earned money to get the same final amount. That’s because interest and growth do the heavy lifting for you.
To illustrate this, let’s look at what it takes to reach a $5 million nest egg by age 67, assuming a 7% average annual return, which is a common historical benchmark for a diversified portfolio.
- If you start at 51, you would need to save roughly $11,500 per month.
- Start at 41, and your monthly contribution is halved to around $4,700.
- Start at 31, and it’s halved again to $2,150 a month.
- Start at 21, and, you guessed it, halved again to only $1,050 per month.
The difference between starting at 21 and starting at 51 is staggering. If you wait 30 years to start, you have to contribute over ten times as much per month to reach the same goal.
This isn’t meant to discourage those starting late, but to highlight that for the young, time is more valuable than the amount of money they have.
Regardless of your age, the greatest risk is procrastination. Financial literacy is a cumulative skill. You do not need to be an expert when you’re 22, but you do need to understand that every year you wait to start saving for retirement makes the ultimate goal significantly harder to reach.
Personal finance about mastering your own behavior. By tailoring your strategy to your current life stage, you ensure that you aren’t just working for your money, but that your money is eventually doing the work for you.
1. Ages 20–30: The Launch Phase
In your 20s, your greatest asset is time, but your greatest obstacles are often a low starting salary, student loan debt, and the feeling that retirement is too far away to matter.
At this stage, the amount you save is less important than the habit of saving. The goal is to normalize the act of putting money away for the future and not spending everything you earn.
And one of the best ways to get into the habit is by understanding where your money is going. While the word “budget” sounds restrictive, it’s actually just a plan on how you spend your money.
In most cases, you can still buy the fun things you enjoy. A budget merely makes sure you can afford to do so without losing the roof over your head or getting into serious debt.
How to start:
- Calculate your fixed expenses (living costs, groceries, loan repayment, etc.) and deduct these amounts from your income. Don’t be surprised if they take up 60% (or more if you live in a city) of your paycheck. The remaining amount is what you have for wants and savings.
- Determine how much you want to save and invest. Again, it’s not so much about how much you save, more of getting into the habit now.
- Spend what’s left on whatever you want.
Set up an automatic transfer from your paycheck to a savings or investment account to remove the temptation of skipping a pay period. If you never see the money in your checking account, you won’t miss it.
Your income should rise as you move from an entry-level role to a mid-level position. But if your spending rises at the exact same rate, you’ll remain in the same financial stagnation despite making more money.
2. Ages 30–45: The Building Phase
Life usually gets more complicated during this stage. You might be settling down with a spouse and kids or gearing up to buy property or even risking it all on starting a business.
Regardless of your path, things are about to be more expensive.
You need to know exactly where every dollar is going, but a simple budget isn’t the only tool that will help you:
- Sinking Funds: A separate savings account for predictable, surprise, and irregular costs can stop you from putting big expenses (like holiday spending, new tires, and back-to-school shopping) on your credit card.
- Childcare Costs Reallocation: Daycare and preschool are massive expenses. So, when your child starts public school and that bill disappears, you suddenly have extra cash. A smart strategy is to immediately redirect at least 50% of that former daycare bill into a 529 College Savings Plan or your own retirement.
- Health Savings Account (HSA): Money goes into an HSA tax-free, grows tax-free, and comes out tax-free for medical bills. In your 30s and 40s, you can treat this as a medical retirement fund, letting the money grow for decades to cover healthcare costs in old age.
Unlike your 20s, how much you save and invest at this age does start to matter. You should prioritize maxing out your retirement accounts by automating your contributions and taking advantage of any employer-matching programs.
That being said, consider aggressive asset allocation since you still have more than 20 years for your investments to grow.
3. Ages 45–60: The Peak Earnings Phase
Usually, your income reaches its highest point during these years. Simultaneously, if you bought a home or had children, your mortgage may be nearing the end and you’re facing an empty nest, both of which mean lower expenses.
This is also the sprint to the retirement finish line:
- Catch-Up Contributions: The IRS allows individuals 50 years of age and older to contribute more to their 401(k) and IRA than younger people. This is a powerful tool to bridge any gaps in your retirement planning.
- Tax Diversification: You should focus on having money in different tax accounts. Some in traditional accounts (taxed later) and some in Roth accounts (tax-free later). This gives you flexibility in retirement to manage your tax bracket.
- Lump Sum Savings: You might receive annual bonuses or tax refunds. Instead of absorbing annual bonuses and tax refunds into your daily spending, treat these as accelerants to pay off debts or further investments.
4. Ages 60+: The Last Phase
The two biggest risks in retirement are inflation and outliving your money. Because people are living longer, a retiree may need their money to last until they are 95.
This requires a portfolio that remains invested in assets that outpace inflation and a budget that accounts for changing expenses.
- Risk Awareness: As you get closer to retirement, you have less time to recover from a market crash. If the stock market drops 30% when you are 25, it’s an opportunity to buy cheap. If it drops 30% the year before you retire, it could delay your retirement by years. This is the stage to begin shifting some assets from aggressive stocks into more stable bonds or cash equivalents.
- Medical Planning: Your physical reliability might start to signal a decline. This age is a critical window for strategic medical planning. If you know you need a major procedure (such as a knee, hip, or shoulder replacement), it’s often financially savvier to schedule those surgeries while you are still covered by an employer-sponsored health insurance plan.
Likewise, healthcare is often the largest expense in retirement. Medical inflation and the natural increase of care usually mean you will spend significantly more on health in your 70s than you did in your 40s. Make sure to plan for your potential retirement needs category, not your current standard.
