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If you’re in your 20s or 30s, you might feel you’re already behind in saving for your future, and the numbers show that’s the case for many: only 55% of adults have enough emergency savings for even three months of expenses, and more than one in three Americans report having no emergency fund at all. Meanwhile, the median retirement savings for those aged 55 to 64 is just $185,000, far below the $1.26 million many think they need for a secure retirement.
That said, successful wealth building isn’t about having perfect timing or earning a massive salary—it’s about understanding the three wealth-building phases and focusing on the priorities for each stage.
Key Takeaways
- Your foundation years are for building strong habits, protecting your financial base, and taking advantage of the time you have for long-term growth.
- During the acceleration period, you have to maximize growth, keep your costs down, and start planning for the preservation period.
- The preservation shift is central to protecting what you’ve built, generating income, and planning for legacy.
Phase 1: The Foundation Years (20s–30s)
Your 20s and early 30s are for laying the groundwork for future growth and setting you up for success during the later phases:
- Emergency fund and insurance: Experts recommend setting aside three to six months of expenses before investing and ensuring you’re insured against major losses, including disability insurance.
- Pay off high-interest debt: Student loans or credit card debt can derail the power of compounding before it even starts. Focus on paying off debts with interest rates of more than 6% to 7% before increasing your investments.
- Start investing early: Even modest contributions in your 401(k), individual retirement account (IRA), or brokerage account benefit enormously from compounding over decades. Make sure to try to get all you can from any employer match, which is free money you don’t want to leave on the table.
- Automate your investing habits: Automate savings and gradually increase your contributions as your income grows. The goal isn’t huge gains right away, but consistent saving and investing, no matter how small.
Phase 2: The Acceleration Period (40s–50s)
By your 40s and 50s, you’re likely entering your peak earning years. The focus of this phase is on supercharging your wealth-building:
- Max out retirement contributions: Increase your savings as a percentage of your gross income. Benefit from employer matches, and use “catch-up” contributions if you’re 50 or older.
- Balance your portfolio: Stay aggressive with growth investments but diversify a portion of your portfolio into bonds or alternative assets as retirement nears.
- Fight lifestyle creep: As your income rises, keep your expenses in check. Some of your extra money should go toward wealth-building, not just more things.
- Review and update estate plans: As your family grows and then changes, update your will, beneficiary designations, and insurance coverage.
- Consider alternatives: With some of your investment funds, you might explore real estate and other alternatives. But don’t let these investments grow so large as to threaten your nest egg.
Fast Fact
These phases aren’t strictly cut off from one another. For example, during retirement, you might seek out investment growth, while in other phases, you might use a more conservative approach to protect savings for shorter-term goals.
Phase 3: The Preservation Shift (60s-Plus)
As you near and then enter retirement, your focus should pivot from growing to protecting your assets:
- Preserve capital: Shift more investments into bonds, dividend stocks, or annuities for income and stability. A diversified, lower-risk strategy is key.
- Beef up cash reserves: Maintain enough for 12 to 36 months of living expenses as you transition from paychecks to withdrawals. This buffer protects against market drops forcing you to sell investments at a loss.
- Decide on retirement withdrawals: Create a flexible withdrawal plan that accounts for market conditions, required minimum distributions, and changing expenses. Factor in Social Security timing (delaying until age 70 can increase benefits by 8% per year), pension payments, and healthcare costs, which typically increase significantly in retirement.
- Plan for longevity: With many people living well into their 80s and 90s, running out of money has become a greater worry than market volatility.
- Legacy and gifting: Document your wishes, explore charitable giving, and communicate your plans with heirs.
When to Break the Age Rules
Age-based guidance works for many, but major life events such as a late-in-life career change or inheritance might require a pivot. For example, someone who starts earning far more in their 50s might need to accumulate for longer, while a retiree returning to work in their 60s may shift back into the growth phase. The key is honestly assessing your current financial reality and time horizon, not just your birth year.
Bottom Line
The way you build wealth evolves as you move through each decade of your life. In your 20s and 30s, your priority is to shore up your financial foundation. As you enter your 40s and 50s, your focus should shift toward maximizing your earnings and savings, while also staying vigilant about managing risks and resisting the creeping expansion of expenses that can come with a higher income. By the time you reach your 60s and beyond, the goal transforms again to safeguarding the nest egg you’ve built.
Throughout all these stages, it’s important to remember that no two financial journeys look exactly alike. The strategies that will serve you best are those tailored to your current phase of life, goals, and needs.
