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Welcome back to Invest in You: Ready. Set. Grow's supplemental Money 101 guide to financial wellness as we emerge from the pandemic.
As Americans start to financially recover from the economic fallout of the crisis, it's a good time to start thinking about building wealth. Yet how you go about it depends on your age.
We'll look at what you should be doing during each decade, from your 20s up to your 60s and beyond, including 401(k) and investment strategies.
Thank you for already undertaking your journey to financial wellness. We hope these supplementary lessons help pave the way forward.
CNBC Senior Personal Finance Correspondent
AGE-BASED WEALTH BUILDING
In your 20s The first thing to do is create an emergency fund. If your job is very secure, have a savings goal of three to six months of expenses. If it is insecure, such as a commission-based sales job, strive for six to 12 months, advises certified financial planner Carolyn McClanahan, an M.D. and founder and director of financial planning at Life Planning Partners, based in Jacksonville, Florida.
You don't necessarily need a financial advisor to start investing. If your employer has a 401(k) plan and offers a match, contribute enough to get that match.
After that, open a Roth individual retirement account, if your income qualifies, McClanahan advises. In 2021, you can contribute a maximum of $6,000.
If you still have money to save after maxing out your Roth, contribute more to your 401(k). In 2021, you can put as much as $19,500 into the account.
At this age, you can take more risks. Your portfolio can have more in equities than fixed income since you have more time to recover from any down markets.
Last, make sure you are insured appropriately, especially auto and disability insurance since one accident or health issue could wipe out any savings you may have.
During your 30s As you grow in your career, don't fall victim to "lifestyle creep" and start spending that newfound money, warned certified financial planner Matt Aaron, founder of Washington, D.C.-based Lux Wealth Planning, an affiliate of Northwestern Mutual.
Instead, up your 401(k) plan contributions. One rule of thumb is to put aside about 10% of your income if you start young, but a financial professional can help you work out the numbers.
After you max out those contributions, start investing outside of your retirement account. Your portfolio should be diversified, with a mix of stocks and bonds.
You may also be thinking about buying a house, getting married, or having children. When you start saving for those events, don't invest in stocks — unless your time horizon is longer than five years, McClanahan advises.
Instead, she recommends a money market account, which won't bring in big returns but isn't as risky as equities.
If anyone is counting on your income, like a spouse or child, it's also time to buy life insurance.
The action-packed 40s You are potentially now in your peak earning years and may be dealing with the cost of raising children.
You may also have aging parents, so check on their financial planning, McClanahan suggests. If they aren't prepared, it is another financial obligation that may be suddenly thrown on your lap.
Assess any college savings you have for your children. If you haven't started yet, don't divert savings from your retirement account if you can't save for both.
For those who haven't begun saving for retirement yet, setting aside 15% to 20% of your income is considered a general rule of thumb at this age, Aaron said.
Getting serious in your 50s Retirement is potentially a decade away, so it's time to get serious about how much you are truly spending, and whether you are on track to save enough to support you throughout your life, McClanahan said.
Once you hit 50, you can also set more aside into your 401(k) or IRA with so-called catch-up contributions. For 401(k) plans, it is up to $6,500 for 2021 and for IRAs it is $1,000 for this year.
If you don't use a financial planner, at least get an hourly one to determine if you are on track to support your lifestyle in retirement, she recommends.
Assess your assets and make sure your portfolio is balanced to your needs. As you approach retirement age, experts typically recommend reducing risky assets, like stocks, and increasing fixed income, like bonds.
However, it's important to maintain stock exposure since it gives you a greater return, Aaron said.
Certified financial planner Elaine King, founder of Family and Money Matters in North Miami, Florida, recommends considering alternative investments, such as start-ups or real estate. They could complement your portfolio of stocks and bonds and add diversification if the market goes up or down.
"Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it."―Albert Einstein
In your 60s and beyond At this point, you need to have a retirement distribution strategy, Aaron said. That means understanding the different income streams you'll have coming in.
If you are worried about taxes, consider investing in municipal-related fixed-income instruments, such as municipal bonds, King said. They are not taxed on the federal level.
It's also important to understand the best option for you to claim Social Security. While you can opt to begin receiving benefits at age 62, you're not entitled to full benefits until you reach full retirement age. For those born in 1960 or later, that is age 67. If you delay taking the benefits from 67 to 70, your amount will increase.
McClanahan recommends those who are healthy and have a high likelihood of living until age 80 wait until age 70. The return on waiting is 8% a year growth, she said.
However, it gets complicated for married couples, and is usually better for one to claim earlier and have the other delay, she noted.
The bottom line The earlier you begin building wealth, the better because of compound interest, which is your interest earning interest.
However, if you haven't started yet, it's not too late. The key is to just begin. As the saying goes, "There's no better time than the present."
We look forward to continuing to help you — Invest In You!
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