Setting goals is key to achieving long-term success — they motivate, provide purpose, and supply a means by which to measure progress. As you brace yourself for the year ahead, take time to decide on new objectives or reevaluate those you already have. After all, your financial goals should naturally evolve with time as you grow your wealth, inch closer to retirement, expand your family, and so on. Check out our best investment goals by age.
In your 20s (especially your early 20s), it can be easy to push investing and retirement savings onto the backburner. It can feel like you have an eternity to build wealth or sock away money for retirement, and it’s also likely you have limited disposable income.
And that’s to make no mention of debt. College grads in the U.S. owe a collective $1.3 trillion in student loans as of 2017, meaning you may be funneling more money into monthly payments than investments in your future.
While being young presents unique challenges for investing, it also offers unique opportunities, as well. You may not yet be tied to a mortgage, and with no children or with younger children, it’s less likely you’re already tucking money away for a college education. A longer timeline to retirement also means freedom to wait out any dips in the stock market, giving you more chance to capitalize on growth.
Here’s how to get the most of those opportunities (and your money) depending on your current financial situation.
If you’re still trying to get on your feet…
Establish an emergency fund.
You know what they say: expect the best, prepare for the worst. No matter what your age, unknowns lurk around every corner, whether in the form of layoffs, unexpected injuries, or unexpected car repairs after your coworker rear-ends you in the parking lot. So though this isn’t technically an investing goal, it should almost always be your first goal.
For now, your emergency fund doesn’t necessarily have to cover three to six months of living expenses, but it should at least provide a few thousand dollars of padding for emergencies. While investments are a great way to grow wealth in the long-term, they’re no guarantee of profit, so set yourself up with a safety net for short-term emergencies before you start investing.
If you have a financial foundation, but are new to investing…
Create a basic portfolio.
With innovative new technology for individual investors, you don’t have to be a professional financial advisor to build a successful investment portfolio. With M1, you can visualize and manage your investments with "pies," where slices represent investments. This allows you to tailor your portfolio to reflect your unique needs by selecting from our Expert Pies, choosing from a variety of stocks and ETFs to build your own, or combining the two to accommodate your preferences. We guide you along the way based on your goals and risk tolerance, so you know exactly how your money is working for you.
If you’re still new to investing or feel apprehensive about creating your first pie, you may want to hold off on picking individual stocks right off the bat (if you have more familiarity with the market, check out our next goal suggestion). Choosing specific stocks requires research and a certain level of experience, so opting for exchange traded funds (ETFs) is a solid option for new or more timid investors.
If you’re investing, but not consistently…
Set up recurring funding.
Automatic deposits ensure investing and retirement savings are a priority, not an afterthought, and guarantee you always pay yourself first. Research shows that “setting and forgetting” contributions to your savings and investments over time yields much greater long-term results than trying to time the market. The only drawback of automatic investments can be the additional expense of commissions — traditional brokerages tend to require payments every time you deposit or withdraw money. Luckily, M1 charges nothing, so it's easy and inexpensive to build wealth over time with incremental deposits.
If you’re already investing and can tolerate volatility…
Take more risk for more reward.
Your 20s can be a complicated time for investing, because while you may not have as much money as you (hopefully) will later in your career, it’s arguably the best time to take risks. You still have decades of work the horizon before you retire, and you likely don’t yet have the responsibilities of kids or a mortgage.
Because aggressive investments are more likely to see volatility in the near-term, investors closer to retirement tend to gravitate toward conservative securities. You aren’t constrained by such a strict timeline. Riskier investments may see greater yields in the long run, meaning they can be ideal for younger investors who have time to ride out any potential volatility for longer-term growth.
Your 30s and 40s are a time of change — some bad, some good. Since your twenties, you’ve likely taken on new challenges and work and may be advancing your career. You may have started a family or purchased your first (or second, or third) home.
As you take control of your personal, professional, and financial life, it’s time to reassess your investments to ensure they align with your fiscal goals. It’s time to have serious conversations about the future, both with your loved ones and with yourself. And above all else, it’s time to get serious about prioritizing your personal finances.
If you’re expanding your family…
Grow your emergency fund first.
Just like in your 20s, you’ll want to have a solid foundation of savings as you work to build wealth with investments. This is especially true for new parents — the more kids you bring into the world, the more you’ll need to grow your emergency savings. Work toward saving enough money to cover six months’ worth of living costs. Adding more family members naturally increases the chance of unexpected expenses, and you’ll want a safety net to fall back on if your finances take a turn for the worse.
If your kids are older…
Save for college, but prioritize retirement.
As parents, we are constantly told to put our children’s needs above our own, and often we are happy to do so. Other times, however, it makes sense to place our needs first, like when putting your oxygen mask on first in a plane crash... or when weighing saving for retirement against saving for college.
That’s not to say you shouldn’t save for your kids’ college education. It just means planning for your financial future comes first, and you may need to pump the brakes on college savings entirely if you’re still struggling to put money away each month for your own financial future. After all, your kids can get scholarships and borrow for college — your 70-year-old self won’t be quite that lucky.
If you’re skating by on minimal retirement contributions…
Ramp up retirement savings to at least 15% of your income.
Retirement may still seem (agonizingly) distant in your 30s and 40s, but now is the time to make more significant contributions a habit. Socking away at least 15 percent of your income is crucial so you’re not playing catchup in the tail-end decades of your career.
You should also use this time to max out a Roth IRA if you meet the income eligibility rules. Contributing to a Roth in addition to a 401(k) or traditional IRA is a great way to cover your bases through tax diversification, since Roth IRA contributions go in after tax and are not taxed in retirement.
If you’re investing consistently (and conservatively)…
Challenge yourself to take more risk.
You’re still young and have many years of work ahead of you before retirement. As a result, you’re less subject to short-term volatility and can more easily take risks that will lead to higher yields in the long term.
While it’s true risk doesn’t guarantee greater returns, it does make them more likely. If taking on augmented levels of risk makes your stomach turn, consider the opportunity cost — opting for a more aggressive asset allocation strategy now may mean the difference between 4 and 6 percent annual returns, along with hundreds of thousands more dollars by the time you retire.
If you are worried about risk...
Pursue cost-effective diversification.
While it’s important to take more risk in your 30s, you should also work to minimize unnecessary risk. Diversification allows you to maintain a certain amount of stability as you continue to grow your nest egg. The problem is, diversification can get expensive. After all, you’ll need to purchase a greater number of stocks in a greater number of industries to cover your bases. That can quickly add up.
To alleviate the extra cost while still gaining the same benefits, consider investing with a platform offering fractional shares, which makes it possible for investors with $300 in assets to reap the benefits of diversification as much as an investor with $30,000.
As of April 2017, the average retirement cost $738,400. That may already seem mind-bogglingly high to some, but consider that number becomes considerably higher if you don’t plan to settle down in a paid-off home, if you hope to travel, or if you’re hoping for a higher standard of living than just “getting by.” Not to mention rising healthcare costs and the fact that Americans are simply living longer than we did 30 years ago (79 years in 2015 compared to 75 years in 1985[^5]). That’s why you may need closer to $2.5 million, depending on your annual spending.
The point is, retirement is expensive and only getting more so. Here are some moves to set yourself up for financial success.
If you’re still worried about saving enough for retirement (and who isn’t?)…
Max out retirement contributions.
Take advantage of catch-up contributions by investing an additional $1,000 per year into IRAs and $6,000 or more (depending on your plan) into 401(k), 403(b), most 457 plans. You no longer have a cushiony, long time frame to procrastinate on building your nest egg, so take any necessary steps to pour as much of your earnings as possible into retirement accounts. Planning ahead and socking away extra money now can make a huge impact in 20+ years.
If your kids still aren’t 100% self-sufficient…
As your kids begin to graduate from college and drift toward financial independence, it’s important to set expectations early, for their sake and yours. Sit down with them to have a frank discussion about when you expect them to be off your health insurance, phone bill, etc. if they aren’t already.
Do they want to get a master’s degree or doctorate? Is marriage on the horizon? Make it clear if and how much you’re willing to contribute, and don’t forget to prioritize your own retirement saving.
And while outlining a plan will help your children anticipate their own personal finances, it’s also crucial so you can organize your budget and investments.
If you’re 5 years out from retirement…
Scale back risk, but don’t forego growth opportunities.
As the light at the end of the 9-to-5 tunnel creeps closer, it’s tempting to rush into defensive mode when it comes to your nest egg. You have less time on the horizon to weather major market downturns, and you might be tempted to follow the 60/40 rule to minimize volatility.
It’s true you’ll want to reduce risk a bit, but the 60/40 stock-to-bond split may not generate the necessary income to stay ahead of inflation or maximize growth of your nest egg as you head into retirement. That’s why it’s important to assess your personal risk tolerance and needs to determine the breakdown that’s right for you. While you’ll want to stabilize your investments and brace yourself for potential future market volatility, keeping more money in stocks is vital as people continue to live longer and longer.
No matter who you are…
Make a plan.
As you head into retirement, you’ll need to know exactly how much money you need to live each year. You’ll want a full, detailed snapshot of your spending rather than simple estimates. If you don’t already have those numbers, start keeping track of them now so you’ll have a better idea of how much you’ll need in retirement to maintain your lifestyle.
From there, you’ll want to create a long-term plan for withdrawals. Consider required distributions, and note the difference between different retirement accounts in order to prioritize withdrawals for optimal savings.
Member of SIPC. Securities in your account protected up to $500,000. SIPC insurance does not protect against loss in the market value of securities. For additional information visit www.sipc.org. Securities and services are provided to clients of M1 by M1 Finance Inc., member FINRA/SIPC. Investments are not FDIC insured and may lose value. Investing in securities involves risk, and there is always the potential of losing money when you invest in securities. Please consider your objectives and possible fees before investing. Past performance is not a guarantee of future results. Diversification is not a guarantee of positive performance. Please note that investments in an IRA may have tax consequences if there are withdrawals before age 59 and 1/2. This is not an offer, solicitation of an offer, or advice to buy or sell securities in jurisdiction where M1 Finance Inc. is not registered.