I am usually not a big fan of “rules of thumb” especially when it comes to financial planning. Mainly because financial planning is so tied to each person’s unique set of circumstances. What works for some may not work for others. As a result, this often leaves people wondering where they stand in their financial well-being or if they are on track. I have outlined the stages of building wealth and included some benchmarks.
Getting Started in your 20’s
There is a lot to accomplish early on. Too often many people overlook basic steps making it much more difficult later in life to build wealth. Like Building a house, we can’t achieve success without a solid foundation. Same thing applies when building wealth, you must have a solid foundation in place and create good habits. Establishing an emergency fund and developing a plan to pay off debt, are two important footings for your foundation. Build a lifestyle that has you living below your means and establishes a consist plan to save each month. Earmark at least 15% of your gross annual income for retirement savings.
Building Momentum in your 30’s
Now in your mid 30’s, the only remaining debt you should have is your mortgage and you should have saved the equivalent of one year’s salary between retirement savings and other savings. As families grow, saving for children’s college becomes a priority as well as life insurance and updated estate planning documents. At this point in time, it’s important to begin working with a Certified Financial Planner ™ who can detail out your goals and create a roadmap.
Hitting your stride in your 40’s
By now, the early habits and discipline of your 20’s are starting to pay off. Monthly saving is second nature and will allow to bump up the college savings. Now is the time for more consistent meetings with your Certified Financial Planner ™ to ensure you stay on track. You should have 3 times your current salary saved.
Big Gains in your 50’s
Now that you are in your upper 50’s, you are entering the home stretch to retirement. This is another critical stretch as this period as typically these years are your highest earning years. As you transition into empty nesters, there will be more discretionary income that can help you make big strides towards building your wealth. In this phase, a target nest egg should be around 5 times your current salary. Your home should be paid off.
Final approach in your 60’s
In your 60’s, as you head into retirement, you should have approximately 10 times your current salary saved. Although working with an advisor is important to truly pinpoint what your nest egg needs to be. Now is the time to look at Social Security and begin to understand the filing options. Your estate planning documents need to be reviewed and updated. All these years, you have been in an accumulation phase, now begins the distribution phase. It’s very important to have a detailed plan of how you should distribute your assets.
Having a good Financial Advisor will help you build a lifestyle and a good stages of building wealth with the process of financial planning.
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