In this blog article, we’ll explore the key financial milestones you can use to help you assess your financial progress to date, no matter your stage of life.
Financial planning is a lifelong process. As you transition from one phase of life to the next, it’s important to review your financial progress and adjust your goals accordingly.
But how do you know if you’re on the right path to financial freedom? While everyone’s financial journey is unique, hitting certain milestones along the way can help you determine if you’re on track toward achieving your long-term financial goals.
Financial Milestones in Your 20s
Your 20s are the perfect time to start building a solid financial foundation. Here are three key financial milestones you should aim to hit in your 20s:
#1: Build an emergency fund.
An emergency fund provides a financial safety net if unexpected expenses arise, or you experience a gap in employment.
Not having adequate savings to cover your expenses can force you to accumulate high-interest credit card debt, which can be costly and potentially difficult to manage. Thus, most financial experts recommend having at least 3-6 months’ worth of living expenses set aside for emergencies.
To get in the habit of saving, consider setting up automatic transfers from your paycheck or checking account to a dedicated savings account for your emergency fund. That way you don’t have to think about it every month, and you’ll be less tempted to spend your emergency funds if they’re in a separate account.
#2: Establish good credit habits.
Your credit score is one of the most valuable financial tools you have at your disposal. Indeed, a strong credit score can save you thousands of dollars or more over the course of your lifetime by lowering your cost of debt.
In addition, many landlords and employers check credit scores as part of their application process. That means a poor credit score may affect your ability to get a job or live where you want.
Here are a few tips for building and maintaining a strong credit score:
- Build a positive credit history. Having a mix of credit accounts, such as credit cards and car loans—and using them responsibly—helps you build a strong credit score over time.
- Pay your bills on time. Late payments can have a negative impact on your credit score, so it’s important to pay your bills by your due date every month.
- Keep your credit utilization low. Your credit utilization, or the amount of credit you’re using compared to your credit limit, can also impact your credit score. It’s generally a good idea to keep your credit utilization below 30%.
- Monitor your credit report. Regularly checking your credit report can help you identify errors or fraudulent activity that can negatively impact your credit score.
#3: Start saving for retirement.
Another one of the financial milestones you should reach in your 20s is starting to build your retirement savings. The earlier you start saving, the more time your money has to grow and compound.
For example, if you contribute $1 at age 20, it could grow to $5.84 by the time you’re 65 (assuming an average annual return of 4% net of inflation). Meanwhile, contributing that same $1 at age 30 means you’ll only have $3.95 at age 65, assuming the same rate of return.
If your employer offers a 401(k) plan, try to contribute at least enough to take full advantage of any employer matching. If not, consider opening an individual retirement account (IRA) to begin saving and investing for your future.
Financial Milestones in Your 30s
Your 30s are a critical time to ramp up your savings efforts as you start to earn more money. Here are three financial milestones to aim for in your 30s:
#1: Increase your retirement savings.
In your 30s, it’s a good idea to start saving more aggressively for retirement to ensure you have enough money to fund your lifestyle goals. While the amount you can contribute depends on a variety of factors, a general rule of thumb is to aim to save at least 15% of your income for retirement.
Your retirement contributions can be spread across a variety of accounts, including employer-sponsored retirement plans, IRAs, and other savings vehicles. If you meet the income requirements, consider contributing to a Roth IRA in your 30s, especially if you expect to be in a higher tax bracket in the future.
Any withdrawals you make from a Roth IRA are tax-free in retirement if you’re at least 59 ½ and meet the five-year rule. And unlike traditional IRAs, Roth IRAs don’t have required minimum distributions (RMDs), so you can let your money grow tax-free until you need it.
#2: Pay off high-interest credit card and student loan debt.
According to data from the Education Data Initiative, adults between the ages of 30 and 45 owe nearly half of all student loan debt in the United States. If you’re still tackling student loans, your 30s are a good time to focus on paying these off so you can direct your resources toward other financial goals.
In addition, try to eliminate any lingering credit card debt you’ve accumulated to this point. High-interest credit card debt can be expensive to service and can keep you from hitting other financial milestones, like maximizing your retirement savings.
#3: Consider homeownership.
Homeownership isn’t for everyone. Depending on your lifestyle and goals, renting may make more financial sense.
Nevertheless, the typical first-time homebuyer is in their mid-30s, according to the National Association of Realtors. If you plan to stay in one place for a while and potentially start a family, homeownership may be one of the key financial milestones you should aim to hit in your 30s.
Keep in mind there are a variety of costs associated with homeownership beyond your mortgage payment, like property taxes, insurance, and ongoing maintenance. As you pursue this milestone, try to avoid overextending yourself by buying a home outside of your budget.
Financial Milestones in Your 40s
Your 40s are a critical time to assess your financial progress and make any necessary adjustments to your daily habits and long-term financial plan. Here are three key financial milestones to try and hit in your 40s:
#1: Max out your retirement contributions.
According to research from PayScale, full-time workers tend to reach their peak earnings years in their 40s and 50s.
Thus, one of the key financial milestones you should strive to reach in your 40s is maxing out your retirement account contributions. In 2023, contribution limits are $22,500 for a 401(k) plan and $6,500 for a traditional or Roth IRA.
By taking advantage of your peak earnings years, you can ensure you have the financial resources to one day retire comfortably.
#2: Fund your children’s education expenses.
If you have children, your 40s can be a great time to start saving more aggressively for their future education expenses. Fortunately, there designated educational savings accounts that can also help you reduce your tax liability. For example:
- A 529 plan is a tax-advantaged savings plan designed to help families save for future education expenses. Contributions to a 529 plan grow tax-free, and withdrawals are tax-free if they’re used for qualified education expenses. Some states also offer state tax deductions or credits for 529 plan contributions.
- A Coverdell Education Savings Accounts (ESA) is another tax-advantaged savings account that can be used to save for education expenses. Like 529 plans, contributions to these accounts grow tax-free, and withdrawals are tax-free if they’re used for qualified education expenses. However, there are income limits for contributing to a Coverdell ESA, and the contribution limit is lower than a 529 plan.
#3: Establish an estate plan.
Lastly, one of the most important financial milestones you can hit in your 40s is creating an estate plan (if you don’t have one already). An estate plan can help protect you, your loved ones, and your assets as your family and net worth grow.
Without an estate plan, your assets may be subject to probate after you pass, which can be a costly, time-consuming, and emotionally draining process for your loved ones. A comprehensive estate plan can also help minimize wealth transfer taxes and other expenses, preserving more of your wealth for your beneficiaries.
As you develop your estate plan, you’ll likely need to create the following documents:
- Last will and testament. A last will and testament is a legal document outlining your final wishes regarding your assets and dependents. Specifically, it allows you to list all your property and heirs and appoint a guardian for your children or pets.
- Revocable living trust. With a revocable living trust, you transfer your assets into the name of your trust while you’re living. Upon your death, a trustee distributes your assets to your beneficiaries without having to go through the probate process.
- Beneficiary designations. Beneficiary designations allow you to direct non-probate assets to specific people or charities. Yet unlike a last will and testament or revocable living trust, beneficiary designations only apply to non-probate assets, like retirement accounts or life insurance.
- Advance healthcare directive. An advance healthcare directive is a legal document that lets you appoint a healthcare agent, share medical information, and outline your healthcare preferences.
- Financial power of attorney. A financial power of attorney lets you select an agent or “attorney-in-fact” to handle financial transactions on your behalf.
Financial Milestones in Your 50s
Your 50s are a critical time to prepare for retirement. As you near retirement age, here are three key financial milestones to hit in your 50s:
#1: Close any shortfalls in your retirement savings.
By age 55, one of the key financial milestones many experts recommend hitting is having about seven to 10 times your annual salary in retirement savings. If you’re behind on your savings goals, consider taking advantage of catch-up contributions.
The IRS allows individuals aged 50 and above to save additional money on a tax-advantaged basis prior to retirement. In 2023, you can contribute an additional $7,500 to a 401(k) plan and $1,000 to an individual retirement account.
#2: Plan for rising healthcare expenses.
According to a 2022 Fidelity report, the average 65-year-old retired couple may need roughly $315,000 to cover healthcare expenses. Depending on your health and other factors, your healthcare costs in retirement may far exceed this estimate.
Thus, it’s important to prepare financially for the rising cost of healthcare so you don’t risk depleting your retirement resources too quickly. Here are a few planning tips:
- Understand what Medicare does and doesn’t cover.
- Take advantage of health savings accounts (HSAs).
- Consider long-term care insurance.
- Stay healthy by eating well, exercising regularly, and getting preventative care.
#3: Pay off your mortgage.
Lastly, one of the key financial milestones many people aim to hit in their 50s is paying off their mortgage. Indeed, paying off your mortgage prior to retirement offers several potential benefits.
For example, eliminating your mortgage can free up a significant amount of cash, which you can then direct toward other financial goals or expenses. It can also provide a sense of security and peace of mind, as many people prefer to enter their golden years debt-free.
You may want to explore strategies for paying off your mortgage faster, such as making extra payments, refinancing to a shorter-term loan, or downsizing to a more affordable home. However, keep in mind there may be opportunity costs associated with paying off your mortgage early. Be sure to consult a financial planner to help you determine if it’s the right move for you.
Financial Milestones in Your 60s and Beyond
Your 60s and beyond are the time to enjoy life. But as you progress through your golden years, be sure to monitor your financial situation and update your financial plan accordingly. Here are three financial milestones to hit in your 60s and beyond:
#1: File for Social Security.
Claiming Social Security benefits is an important decision that can have a significant impact on your retirement income. Here are a few key points to keep in mind as you plan to claim your Social Security benefits:
- Social Security benefits are based on your average earnings over your lifetime, adjusted for inflation. The longer you work and pay into the system, the higher your benefits will be.
- You can start claiming Social Security benefits as early as age 62, but your benefits will be permanently reduced if you claim them before your full retirement age (FRA). If you delay claiming benefits beyond your FRA, your benefits can increase by up to 8% per year.
- If you’re married, coordinating your Social Security claiming strategy with your spouse can help maximize your combined benefits over your lifetimes.
- If you claim benefits before your FRA and continue working, your benefits may be reduced if you earn more than a certain threshold.
#2: Manage Required Minimum Distributions (RMDs)
If you’re 72 or older, the IRS requires you to take distributions from your traditional IRA each year. Required minimum distributions (RMDs) can increase your taxable income and potentially push you into a higher tax bracket.
You can withdraw more than your RMD amount in any given year—but be prepared for the potential tax consequences. On the other hand, the IRS imposes a penalty of up to 50% if you fail to take your full RMD before the deadline. Both scenarios can be costly, so proper tax planning is essential.
#3: Plan Your Legacy
For many, legacy planning can be one of the most important financial milestones you’ll reach in your lifetime.
Indeed, a legacy plan helps ensure your assets are managed and distributed according to your wishes. Yet it can also help preserve your values and memories for generations to come.
By taking the time to develop a legacy plan, you can leave a lasting impact on your loved ones, your community, and the world. A financial planner can help you develop a gifting and legacy plan that considers your values and long-term financial goals, as well as the potential tax implications for your beneficiaries.
Milestone Asset Management Group Can Help You Reach Your Key Financial Milestones
Setting financial goals and continually assessing your progress toward them is a critical component of the financial planning process. No matter your financial goals, a financial planner like Milestone Asset Management Group can help you identify strategies and solutions that help you achieve them efficiently.
Our in-house team of financial planners, CPAs, and estate planning attorneys has the expertise to help you reach these financial milestones and more. To begin your financial planning journey, please schedule an introductory call.
