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Meet Jake (not his real name but face_cowboy88 on Reddit ), a 29-year-old professional who makes $105k a year but has completely ignored his 401(k). Well, almost completely. He only has a balance of $2,500.
Like many people in their 30s, Jake is juggling responsibilities. He's trying to pay down debt, manage expenses, and plan for the future. But with his low balance, he's worried about whether or not he'll ever be able to get back on track.
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In this article, we'll examine Jake's financial situation in more detail, assess his current situation, and offer advice to help him get back on the tracks.
Let's look at where Jake stands:
Jake's Financial Snapshot
Looking at Jake's whole financial situation is important.
Your financial situation is much more than just a number in your bank account. It's important to take a step back and take a larger look at your financial well-being, and that's exactly what we're going to do for Jake!
Jake has saved $2,500, mostly in his 401(k). He hasn't been following the traditional advice of contributing 10% of his salary, and his employer likely has a match he hasn't been taking advantage of.
Jake is far off from the recommended track. But what is the recommended amount you should have saved by your 30th birthday? And how can Jake get back on track?
Is Jake on Track?
Most of Jake's savings are in a 401(k).
Financial experts recommend having around 1-2 times your annual salary saved by age 35. Jake is well behind on that benchmark, having saved only $2,500. Based on his income, he should have closer to $105,000.
(We've also covered how much you should have saved by 50 .)
That's not all we should look at to determine if he's on track, though. His current savings rates, future salary increases, and retirement goals all play a role. Compound interest will help his savings grow more over time, providing him with a solid foundation for his future savings.
Still, Jake is likely far behind on the curve, and it'll take some serious wrangling to get back on track. But that doesn't mean it's impossible.
Key Tips for Jake (And You)
Master these three tips first.
What should Jake's next steps be? Here are three tips we'd recommend for Jake:
- Increase contributions gradually: While Jake just started contributing 10% (and that's a great start), increasing it by 1-2% each year can make a big difference over time. Gradually boosting contributions helps savers take advantage of compounding.
- Diversify investments: It's important that Jake's money is invested wisely. His 401(k) and other savings should be invested in a range of assets, including stocks, bonds, and mutual funds. Diversifying helps protect his savings from market volatility while still letting it grow.
- Consider long-term goals: Jake should regularly review his retirement goals, such as his desired retirement age. Whether you're "on track" depends largely on where you're trying to go!
After those base tips, there are a few other things Jake can do to improve his situation:
1. Managing Debt While Saving
Managing debt while saving is a very difficult balancing act.
Jake may have some debt, though it seems manageable from his post. He can consider accelerating his payments. Refinancing to a lower interest rate or using the debt snowball method—paying off smaller debts first to build momentum—could help him reduce the burden faster without sacrificing his savings goals.
There is absolutely a balancing act here, though. At some point, it makes more sense to put that extra money in a savings account and take advantage of the interest rather than using it to pay low-interest debt.
Jake should also ensure he has an emergency fund to prevent him from taking out more debt. He should aim to have 3-6 months’ worth of living expenses saved in a separate, easily accessible account.
This emergency fund provides a cushion in case of unexpected expenses, like medical bills, without needing to tap into his retirement savings.
2. Preparing for the Future
Planning for the future helps you stay prepared and on track.
Of course, Jake isn't at retirement age. Just because he gets on track now doesn't mean he will be in the future!
It's important for Jake to consider how upcoming life changes, like career shifts or buying a new home, may impact his financial situation. These events often come with additional expenses, so planning ahead can help him stay on track with his savings while managing these new costs.
Part of protecting his future also includes investing in the right insurance coverage. This includes health insurance, life insurance, and disability insurance.
Proper coverage can help safeguard Jake's savings and provide peace of mind in the case of unexpected accidents.
3. Maximizing Employer Benefits
Employer matches are basically free money.
Jake should fully benefit from his employer's 401(k) match (which is what we recommend everyone do). He must continue to contribute enough to reach this match.
It's basically free money. Not taking full advantage of it would be leaving money on the table.
Many companies offer additional benefits like Health Savings Accounts, stock purchase plans, or tuition reimbursement. These change regularly at many employers, so everyone must stay updated on their company's offerings.
These extra options can boost your financial position. For instance, contributing to an HSA can provide tax advantages while saving for future healthcare expenses.
4. Tracking and Adjusting Your Plan
Make sure your financial plan matches your life's mission.
Jake should review his savings, investments, and financial health annually, at the very least. The more you review your plan, the sooner you can crash-correct.
Life changes or market conditions outside of your control may make you adjust your plan. This isn't necessarily a situation where you have a baby and need to adjust. Changes that you aren't even aware of could occur. The sooner you notice them, the better.
Using budgeting apps and retirement calculators can help you visualize your progress and make data-driven decisions about your financial future.
5. Tax Strategies for Long-Term Savings
Be sure you understand the tax implications of each different account.
Jake is already using a 401(k), but he has other potential options, too.
A Roth IRA allows for tax-free withdrawals in retirement as long as certain conditions are met. Contributions are made with after-tax dollars, which means that Jack pays taxes before the money is put into the account (but he doesn't have to pay taxes later).
Traditional IRAs offer tax-deductible contributions, which can reduce Jake's taxable income now. But he would need to pay taxes when he withdraws funds in retirement.
Using several of these accounts provides some flexibility.
Jack's Journey and Your Own Path Forward
Continue planning to stay one step ahead.
Jake's financial situation shows that he's not on the right track, but there is always room for improvement. He can get back on the rails by increasing his contributions, managing his debt wisely, and preparing for the future proactively.
Taking these steps should help him get more prepared for retirement, even though he is currently far off track.
Jake's store serves as a reminder that financial planning is an ongoing process - one that you should review and adjust regularly.
Whether you're like Jake or already have thousands saved, the key is to stay proactive and informed.
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