When Is The Best Time To Start Saving For Retirement
Whether you’re 25 or 55, you’ve probably given at least some thought to saving money for retirement. But according to a 2020 report from the Federal Reserve, one-fourth of American adults who aren’t retired lack a single penny of retirement savings. The good news? It’s never too late to begin setting aside money for retirement. The best time to start saving for retirement is nowbefore time gets away from you.
Why do you need to save for retirement? Any way you slice it, retirement is expensive. Depending on your goals, you might need enough stashed away to provide roughly 70% to 90% of your pre-retirement annual income in order to live comfortably once you stop working. In addition, you might wind up living longer than you thought you would, meaning you’ll need even more money to cover basic necessities, including health care and housing.
Waiting To Save For Retirement Could Cost You
When it comes to saving for retirement, the clock is ticking. To illustrate the value of time, lets consider three Roth IRA investors.
Kate, Derek, and Jane all decide to open Roth IRAs to supplement their other retirement accounts. Each investor hopes to build this account to $500,000 at the time of retirement, though they are starting to save for retirement at different ages. All plan to retire at age 65, and the investors maximize their contributions each year.
*People age 50 and older are allowed to include a $1,000 catch-up contribution.
Get Creative To Find The Cash For Retirement Planning
If you’re in your 20s, chances are you’re living on a tight budget, and it’s easy to skip over retirement planning. But with a little motivation, being in your 20s can also mean you’re in a unique position to find extra cash to put away in your retirement account.
If you don’t have kids or a mortgage, you may have more time and flexibility than you realize. Could you tolerate giving up your one-bedroom apartment to move in with roommates for a year? How about spending a few hours after work or on the weekends spinning your creative hobby into a freelance gig? You could even relive your babysitting glory days. Or drive for Uber, participate in a medical study, or become a live art model. When you’re retired, you’ll enjoy looking back at the fun lengths you went to get there.
Everyone has their own idea of what kind of retiree they’re going to be glamorous traveler, leisurely golfer, kindly senior citizen who walks around parks befriending pigeons but one thing is consistent: none of those options, even the last one, is possible without a healthy cash flow. The good news is that you’re ahead of the curve right now. You don’t have to put away half your paycheque every month to ensure you’ll be comfortable in retirement. Start small and prepare to marvel at how it all adds up.
Don’t Miss: I Have 1.2 Million Can I Retire
When Does The Average Person Start Saving For Retirement
According to the Federal Reserve’s latest “Report on the Economic Well-Being of U.S. Households,” 62% of Americans between the ages of 18 and 29 have some amount of retirement savings, but only 28% felt like their savings were “on track.” This increases to 71% and 34%, respectively, for those between the ages of 30 and 44.
Is 30 Too Old To Start Investing
No age is too old to start investing for retirement, because the best time to start is today. The sooner you start investing, the more advantage you can take of compound interest, and potentially employer matching contributions if you open an employer-sponsored retirement plan.
- Mon-Thu 5:00 AM – 7:00 PM PT
- Fri-Sun 5:00 AM – 5:00 PM PT
Home Loans General Support:
- Mon-Fri 6:00 AM 6:00 PM PT
- Closed Saturday & Sunday
- Mon-Thu 8:00 AM 8:00 PM EST
- Fri 8:00 AM – 7:00 PM EST
- Closed Saturday & Sunday
- Mon-Thu 5:00 AM – 7:00 PM PT
- Fri-Sun 5:00 AM – 5:00 PM PT
Recommended Reading: Retirement Communities In Prince William County Va
How Much You Should Be Saving For Retirement By Age
According to a study by the National Institute on Retirement Security in the US, 66% of working millennials have no retirement savings. Letâs change that.
If at age 20, you invest $400 per month and earn 8% in the stock market on average per year, youâll have $2 million at age 65. If you start at 35, youâll have $587,000 at age 65. Invest tip: start early. Putting money into a savings account is not investing, itâs actually the opposite because inflation will likely devalue your buying power.
With that in mind, another way to look at this is your savings rate, in other words, the percentage of money from your paycheque you can put towards investing. The higher your savings rate, the fewer working years until retirement. In theory, the way you spend will be about the same in retirement as it is today.
How To Manage Your Existing Debt
One of the mistakes people make is thinking they have to pay off all of their debt before they begin saving for retirement.
Depending on the amount of debt you have, that could put off retirement savings indefinitely.
At a minimum, you should try to take advantage of any employer-sponsored retirement savings plan as soon as you are eligible.
Some employers automatically contribute. Most offer a matching contribution plan.
Strive to contribute up to the amount your employer offers to match, even if you have looming debt.
Pro-TipThere’s no true consensus among financial experts on how to tackle something like this.Some gurus think you should save for retirement before paying off debt, while others advocate for being debt-free and then saving for retirement.The best thing to do is find a plan you trust and follow their system. Mixing and matching plans isn’t ideal if you don’t know what you’re doing.
Don’t Miss: Is $5 M Enough To Retire
How To Save For Retirement In Your 50s
By the time you reach your 50s, youre heading for the home stretch. That doesnt mean, however, that youre done working or saving. This is the right time to pay off your mortgage and ensure your overall debt is at a minimum. Stay the course with your savings and speak to a financial advisor about gradually adjusting your investment strategy as you near retirement.
Emergency fund: Keep your emergency fund topped up, especially if unexpected expenses have come along.
Additional savings: Invest additional savings once you max out your contributions to individual and employer-sponsored retirement plans.
Educational savings: Once the kids head off to college, tap these funds to pay for college. Funnel the amount you were saving for college expenses into your retirement and taxable brokerage accounts.
Retirement savings: Review your contribution percentage annually. Once you turn 50, youre eligible for an increased annual contribution limits in tax-advantaged retirement accounts. If youre behind on your goals, take advantage of these increased thresholds. By the time you turn 55, aim to have seven times your current annual salary in retirement savings across all of your savings and retirement accounts. By the time you turn 60, you should have eight times your annual salary in retirement savings.
Catch-up tip: If you need some extra cash to sock away, you explore seasonal employment around the holidays to up your annual retirement savings rate.
Saving For Retirement In Your 40s
A lot can happen in your 40s. You may be itching for a career change, or might find yourself settling into a more senior role with a higher salary. Either way, your 40s are a time to keep your debt to a minimum and your savings at a maximum. If a career shift or new business venture is in your plans, cash savings outside of your retirement accounts can fund your dreamskeep your retirement money hard at work.
Emergency fund: Do a check-in and make sure that you still have at least six months of living expenses saved, especially if youve bought a house or started a family.
Additional savings: Keep using a taxable brokerage account to invest additional savings.
Educational savings: Keep contributing to your educational savings plans for your kids.
Retirement savings: Review your contribution percentage annually, especially if your compensation has significantly increased. By the time you turn 50, aim to have six times your current annual salary in retirement savings.
Catch-up tips: If youre feeling behind in your savings, review your expenses and see where you can cut back. Each month, save any extra money in your IRA or emergency fund to further protect your retirement savings. You could also consider a side hustle to bring in some extra cash to boost your savings.
Recommended Reading: Can I Retire At 60 With 3 Million Dollars
Who Will Have More Money Saved Up In The End
Your friend will have saved up around $230,000. Your retirement account will be a little over $1.17 million. Even though your friend was investing over 10 times as much as you toward the end, the power of compound interest makes your portfolio significantly bigger.
Remember, the longer you wait to plan and save for retirement, the more you’ll need to invest each month. While it may be easier to enjoy your 20s with your full income at your disposal, it will be harder to put money away each month as you get older. And if you wait too long, you may even need to postpone your retirement.
Set Up Automatic Recurring Deposits
Most financial advisors recommend you set up a regular cadence of deposits into your retirement accounts, whether thats through a workplace 401 or in an IRA. If youre using a 401 at work, youre probably already set. If youre investing with an IRA, make sure youre making regular deposits that wont exceed the annual limits.
Access to thousands of financial advisors.
Expertise ranging from retirement to estate planning.
Match with a pre-screened financial advisor that is right for you.
Answer 20 questions and get matched today.
Connect with your match for a free, no-obligation call.
Not only does this keep you from having to take the time and energy to buy investments every month or week, but it also prevents you from spending money youd rather save. It also may help you pay less per share on average, thanks to a powerful principle called dollar-cost averaging.
Don’t Miss: At& t Retirement Benefits Phone Number
Protect Yourself Against Market Risk
When you put money into a 401k or IRA account, youre actually investing in the stock market which has natural ups and downs. Fortunately, if you begin saving for retirement early, you can cushion yourself against some of this volatility. Your finances will be able to handle these dips because youll have plenty of time to ride out any short-term losses. This means that you can take more aggressive action with your portfolio and potentially yield higher returns.3 As you get closer to retirement, thats when youll start shifting from growing your wealth to protecting all that youve saved.4
The Boring Glory Of Index Funds
Your best bet is to buy something called an index fund and keep it forever. Index funds buy every stock or bond in a particular category or market. The advantage is that you know youll be capturing all of the returns available in, say, big American stocks or bonds in emerging markets.
And yes, buying index funds is boring: You usually wont see enormous day-to-day swings in prices the same way you may if you owned Apple stock. But those big swings come with powerful feelings of greed, fear and regret, and those feelings may cause you to buy or sell your investments at the worst possible time. So best to avoid the emotional tumult by touching your investments
Read Also: Best Investments For Retired Seniors
Investing In Your 40s
When it comes to how much you should have saved for retirement by 40, one general guideline is to have the equivalent of your two to three times your annual salary saved in retirement money.
Once you have high-interest debt paid off, and have a good chunk of emergency savings set aside, take a good look at your monthly budget and figure out how to reallocate some money to start building a retirement savings fund.
Not only will regular contributions get you on a good path to savings, but one-off sources of money are another way to help catch up on retirement savings faster.
Starting A Retirement Plan Early
Ideally, you should be able to start saving for retirement as soon as you’re eligible.
For example, a registered nurse can expect to make about $65,000 annually beginning their first year on the job.
If the RN begins working at age 23 and they save 10 percent of their income with the plan to retire at age 72, they will have more than $3 million by the time they retire.
A 45-year-old with the same metrics would have only $500,000. That sounds like a decent amount until you consider the high cost of living in old age.
Theoretically, that $500,000 would run out after about five years. It is much better to start saving earlier if at all possible.
Read Also: Safe Withdrawal Rate In Retirement
What Is A Wealth Management Account
Like a 401 or an IRA, a wealth account is also an investment vehicle. But unlike an account designed specifically for retirement, these accounts do not have the same tax benefits.
You might consider using a wealth account if you want to invest for a goal other than retirement, or if youve maxed out your retirement accounts.
Because a wealth account does not have the tax benefits of a 401 or IRA, it also doesnt come with the same early withdrawal penalties. Wealth accounts are often called after-tax accounts because you contribute and invest money youve already paid income taxes on and you pay taxes on the capital gains when you withdraw your cash.
Just like checking and savings accounts at banks, these accounts can also have maintenance fees.
Tip #1 Become Familiar With The Retirement Living Standards
As we mentioned in Lesson 3, the Pensions and Lifetime Savings Association states a moderate level of annual income in todays money for a single person in retirement is £20,200 and £29,100 for a couple. If you dream of having some luxuries in retirement, the comfortable level of annual income recommended for a single person jumps to £33,000.
Recommended Reading: How Much You Need To Retire At 60
Consider How Inflation Will Affect Your Savings
Inflation is the rising cost of consumer goods and services. It’s measured by the Consumer Price Index . The CPI measures changes in the price of about 600 consumer goods and services over time.
You can look at the impact of inflation in two ways:
- it will increase the cost of goods and services you buy
- it will reduce the buying power of your savings over time
For example, a $100 purchase in the year 2006 costs approximately $118 is 2016.
Im 35 What Should I Have Saved
There is a lot of research showing that people tend to rely on approximations or rules of thumb when it comes to financial decisions.
With this in mind, many financial firms publish savings benchmarks that show the ideal levels of savings at different ages relative to an individuals income. A savings benchmark isnt a replacement for comprehensive planning, but it is a quick way to gauge whether youre on track. Its much better than the alternative some people useblindly guessing! More importantly, it can act as a catalyst to take action and start saving more.
However, for the benchmark to be useful, it needs to be realistic. Setting the target too low can lead to a false sense of confidence setting it too high can discourage people from doing anything. Articles on retirement savings goals have generated spirited discussion about the reasonableness of the targets.
So, to answer the question, we believe having one to one-and-a-half times your income saved for retirement by age 35 is a reasonable target. Its an attainable goal for someone who starts saving at age 25.
For example, a 35-year-old earning $60,000 would be on track if shes saved about $60,000 to $90,000.
Savings Benchmarks by AgeAs a Multiple of Income
Also Check: Tax Efficient Retirement Withdrawal Planning
How To Start Saving For Retirement In Your 40s+
Now its time to get serious about your retirement savings. If youre just starting out, it is recommended that anyone over the age of 35 should be putting away at least 18% of their annual earnings into a pension pot to retire at age 68. But you should also consider if this is the right age to be retiring and if youre on track to fund your lifestyle see the retirement lifestyle savings milestones table above.
How To Catch Up If You’re Off To A Late Start
If you’re behind on your savings, all hope is not lost. There are a few things you can do to make sure you can afford to live a comfortable, enjoyable retirement.
First, create a budget to map out all your expenses and see if there are areas where you can make cuts. Depending on how far behind you are on your retirement planning, you may need to make minor cuts or significant sacrifices to save as much as you should.
Sometimes, all it takes is multiple small adjustments to save a lot more each month. Divide your costs into different categories based on how necessary they are, and try to trim your expenses by at least a few dollars in each category. If you’re seriously behind on your saving, you might need to take more drastic measures — like selling your car ordownsizing your home. If you’re unable to save anything more now, just remember that you’ll likely need to make major sacrifices in retirement. With little to nothing saved, you may end up depending on Social Security benefits to get by. And when the average check amounts to just $1,471 per month, you could find yourself struggling to make ends meet.
That said, Social Security can help make retirement a little more comfortable financially. Though you won’t be able to depend on it for all your expenses , it can help bridge the gap between what you have and what you need. And if you don’t have much in terms of personal savings, you may be able to boost your Social Security benefits to make up for it.
Don’t Miss: What Is A 403 B Retirement Plan