There is an ancient Chinese proverb: “The best time to plant a tree was 20 years ago. The second best time is now.” The same is true when you consider your financial future and investing for retirement.
Granted, it’s hard to think about retirement when you are in your 30s, especially in the middle of a pandemic. If you are fortunate enough to still be working during the pandemic, then it’s a good time to add to your retirement fund, especially if you are saving money by staying home.
If you have lost work because of COVID-19, then you need to preserve your retirement savings, even though it may be tempting to spend it. That’s part of Investing 101. It’s also a good time to revise your retirement plan and investment strategy.
The coronavirus pandemic has thrown the stock market into turmoil, which makes it a good time to invest and recalibrate your financial goals. Historically, bear markets always rebound. A bear market occurs when stock values decline 20 percent or more. There have been 16 bear markets since 1926, averaging once every six years, and they last an average of 22 months with losses averaging 39 percent. However, bull markets typically follow bear markets. There have been 14 bull markets, and the S&P 500 has gained 47 percent since 1930.
Although the future is uncertain, if you invest while in your 30s, you have a long time to put your money to work—and, historically, you can count on the bulls trampling the bears.
A Good Time to Reset for Retirement
If you can afford to invest your money or want to adjust your portfolio to take advantage of bear market bargains, it’s a good time to develop a balanced retirement strategy:
- Start with your 401(k). If your employer is matching your 401(k) retirement savings, be sure to take advantage. Very few wage earners max out their 401(k), but the more you invest, the better. Not only do you get more tax-deferred money for retirement, but your 401(k) contributions are also made using pre-tax dollars, so you get immediate tax benefits as well.
- Consider adding IRAs and Roth IRAs to your annual retirement savings strategy. IRAs are tax-advantaged like your 401(k), whereas Roth IRAs require you to pay the taxes now so you don’t have to pay them when you retire. Your 30s are a good time to buy Roth IRAs because you may be earning less income than in your 50s or 60s, which are often peak earning years.
- Your 30s are also a good time to consider target date retirement mutual funds. These are funds that are designed to target higher-risk/higher-growth stocks when you are younger and move into lower-risk/lower-return stocks as you approach retirement age.
- Review your individual stocks and bonds. Based on the established rule that you should subtract your age from 100 and keep that percentage of your portfolio in stocks, when you are in your 30s, you should consider investing about 70 percent of your retirement funds in stocks. Other experts recommend a balanced portfolio of 60 percent stocks and 40 percent bonds.
As you review your investments, also consider your taste for risk. In your 30s, you are still young enough to consider investing in higher-risk stocks and bonds that often yield higher returns. You may also decide more conservative investments are more your speed.
Balance Your Debt and Retirement
By the time you reach your 30s, you may be carrying debt such as student loans, car loans, credit card debt, and personal loans. You want to balance your debt against the amount you put into retirement savings. Putting more away for long-term savings and retirement is often more advantageous than focusing on paying down low-interest debt.
Of course, you want to have a plan to reduce your debt burden. Develop a strategy to pay down a little each month, focusing on the debt with the highest interest rates first. Once you are debt-free, you will have more money to put into savings.
As you plan your retirement strategy, consider appreciation and depreciation of assets. For example, if you buy a home, it is likely to appreciate over time. You can use the equity from the house to invest for retirement, or you may consider applying the profits from the sale of the house to your retirement fund. Compare these appreciating assets to depreciating assets, like a car, furniture, or a smartphone, which generally decline in value over time.
Many couples downsize in retirement and sell larger family homes for smaller houses or condominiums that are less expensive and easier to maintain. You also should be able to retire other debt, such as student loans and car payments, which frees more money for retirement savings and living expenses.
As you are developing your retirement savings strategy, don’t forget to put money aside for an emergency fund. If the pandemic has taught us anything, it’s to be prepared, so have enough money set aside to pay your household bills for a while in case you lose your job or become ill. Put your emergency fund somewhere it will earn interest but is still accessible, like a savings account or money market account.
The most important thing is to start investing and planning your retirement now. As you enter your 30s, your career is advancing, you are earning more money, and it’s the perfect time to plan for the future. If you need help developing a retirement strategy, Retirement Strategies: Building a Successful and Secure Retirement is a good place to start. You also might consider scheduling an appointment with one of the iQ Credit Union investment advisors.