Personal finance

Here's a Guide to Build Wealth, Decade by Decade

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There is never a better time to start building wealth than the present.

Yet how to go about it depends on your age.



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"The better job you do with creating your financial security, the more flexibility it provides you to make better choices in the future," said certified financial planner Carolyn McClanahan, an M.D. and founder and director of financial planning at Life Planning Partners, based in Jacksonville, Florida.

Here's a decade-by-decade guide to increasing your wealth.

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, McClanahan advises.

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 said. 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, 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

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As you grow in your career, don't fall victim to "lifestyle creep" and start spending that newfound money, warned CFP Matt Aaron, founder of Washington, D.C.-based Lux Wealth Planning, an affiliate of Northwestern Mutual.

Instead, up your 401(k) plan contributions. The 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, he said.

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.

Historically, stocks return about 7% a year, adjusted for inflation, so it's important to invest instead of letting it sit in a savings account or under your mattress, said CFP Elaine King, founder of Family and Money Matters in North Miami, Florida.

"Every 10 years, the money has the power to double," she said.

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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.

"You can borrow for college, but you can't borrow for retirement," McClanahan said.

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.

It's also a good time to start thinking about a side hustle to improve your income stream beyond your job, King said. Think of it as a Plan B if you lose your job, as well as something you can continue when you decide to leave, she said.

Getting serious in your 50s

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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.

King actually recommends considering alternative investments, such as startups or real estate. They could compliment your portfolio of stocks and bonds and add diversification if the market goes up or down.

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.

"We need to build an investment strategy based on a proper asset allocation, taking on only as much risk that is needed for the income you require and your legacy goals," he said.

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. Too many people take it at age 62, which is the earliest you can do so, McClanahan said.

However, you aren't entitled to full benefits until you reach your full retirement age, which is 67 for those born in 1960 or later. If you delay taking the benefits from 67 to 70, your amount will increase.

"Delaying that is the best investment you can make in your future," McClanahan said.

She recommends those who are healthy and have a high likelihood of living until age 80 wait until age 70. The return on waiting is an 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.

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