Your Guide to Saving for Retirement in Your 20s, 30s, 40s, and 50s
Most of us dream of the day we can retire from the workforce. That doesn't mean that we plan to sit around and watch the grass grow all day, but we would love the opportunity to enjoy life without worrying about our finances. And by the time we reach retirement age, many of us have been working for over half a century. We have earned the rest from constant labor. That's why it is important to begin saving for retirement now. "No matter what your age, or marital status, people should start saving as early as possible," says Yanela Frias, senior executive for Prudential Retirement. "You're never too young or too old to start saving."
People are living longer and expenses are higher than ever, Frias explains, which is why we need to plan to save more for retirement than previous generations. And while it is recommended to begin saving for retirement in your 20s, it's never too late to start. "Studies have shown that in order to accumulate enough money to achieve a secure retirement, the average person needs to contribute 12 to 15 percent of their annual salary during their working life. So, for those who didn't start saving as soon as they entered the workforce, it's not too late to start," explains Frias. "In fact, if you're 50 or older, the IRS allows you to contribute more into your retirement savings plan than when you're under 50. And that is a great way to catch up and make sure your account is growing as much as it possibly can."
There is also no magic number for a retirement savings amount. It all depends on your goals and your estimated living expenses at retirement. Rich Ramassini, the director of strategy and sales performance for PNC Investments, suggests asking yourself these questions while working with your financial planning advisor: When do you think you will start your retirement? What do you want your retirement to look like? How much will retirement cost? And, where will the money come from? With the answers to these questions in mind, you can develop a plan to begin saving for retirement.
How to Save Money
It's critical to practice healthy financial habits throughout your life, not just during times of boons and busts. And it's important to understand that how we think about money can change dramatically over time. In your 30s, you may be thinking about buying a home or starting a family. In your 40s, you're probably hitting your earnings peak and maybe want to start a new business or change careers, and in your 50s, retirement is just around the bend. All of those milestones require a shift in how you spend and save.
Michelle Perry Higgins, a financial planner and author of The Everything Binder, College Poor No More and Stocks, Bonds & Soccer Moms, says that following rules of saving are important to help secure your current and long-term financial life, no matter what your age: Keep all documents for your financial, estate, and personal affairs in one location so you—or someone acting on your behalf—can easily access information. Pay down debt, pay your credit card balance each month, and live within your means. And lastly, negotiate for more money—it never hurts to ask. "Your true monetary worth takes into account salary, bonus, retirement plans and employer contribution, stock options, car allowance, and any other benefits a company may offer," explains Higgins. "Knowing the full value of your compensation package gives you the tools to negotiate wisely."
In Your 30s
Don't assume that you can put off saving for retirement or that you don't need to make a budget if you're only making a little money. Everything counts, especially when you compound interest early in the game. In your 30s, you should make it a habit to maximize your company's benefits and contribute to your retirement plan. Your minimum contribution should be the company's match (so if your employer puts in 50 cents for every dollar up to $3,000 a year, for example, you'll want to put in at least $3,000 to get the extra free $1,500 from your employer). Increase your retirement savings one percent every year as your salary increases. Start an emergency fund: The goal is six to nine months of living expenses. Other considerations: get rid of student loans and other debt, or consider purchasing your primary home.
In Your 40s
Don't assume that your retirement contributions can lapse while paying for your kids' college education. Your retirement comes first. If needed, meet with a financial planner to get on track with retirement planning. If you have children, create or review your estate plan, review beneficiaries, and specify a guardian. If you're married, talk about money with your spouse. It's easy to put off thinking about money, or hand over duties to someone else, but the person who has the most riding on your financial future is you. "I strongly encourage women to advocate for their own financial security, be educated, and take control," adds Higgins.
In Your 50s
Don't assume you'll have enough for retirement. Sometimes, people set the process in motion and realize they're falling short on what they need. Consider downsizing your home or relocating to an inexpensive area in preparation for retirement. Review long-term care needs. Start the catch-up option in your retirement plan—for example, if you're over 50 you can contribute an additional $6,000 to your 401(k). Evaluate medical needs for retirement and insurance coverage.
Both of our retirement investment experts advise taking advantage of your employer's retirement savings benefits. Pensions are no longer common and have been replaced with the 401(k), which Frias says is only available through employers. The 401(k) saves a percentage of your pre-tax dollars into an account. You only have to pay taxes on it when you withdraw the money in retirement. And there's an additional plus side to investing in your employer's 401(k) plans: matching contributions.
What does this look like? "The employee can choose to set aside a certain amount of money, up to some limits; the company will oftentimes match that—dollar for dollar up to four percent, or 50 cents up to six percent—the company will determine how they want to structure their match," explains Ramassini. "If I put in $100 per paycheck, the company will put in $100 [match]. I made a $100 investment but now have $200 in my account." You should contribute at least enough to get the full company match that your employer offers. According to Frias and Ramassini, this is essentially "free money" going toward your retirement, and you want to take advantage of it.
Individual Retirement Accounts
Another way to save for retirement is through Individual Retirement Accounts, also known as IRAs. You have two main options when it comes to an IRA: Traditional or Roth. "The key difference between Traditional and Roth IRAs is, basically, when you pay taxes, either today or upon retirement," says Frias. Traditional IRAs save pre-tax dollars into the account, which grow tax-deferred, and distributions (when you can take the money out in retirement) are taxed, while Roth IRAs save post-tax dollars and the distributions are tax-free.
Because of the tax treatments of retirement accounts, the IRS has also imposed a few limits on how much a person can contribute to their retirement accounts. This is updated every year and tied to cost of living, as Ramassini explains. In 2019, you are only allowed to save up to $6,000 a year in an IRA. But people over 50 can contribute an additional $1,000 in their accounts. You can also have both a Traditional IRA and a Roth IRA, Ramassini says, but your total annual contribution can't be more than the limits the IRS has imposed. You would have to split up your annual limit (in this case, $6,000 a year) between the two retirement accounts. For example, that means you could contribute $4,000 in one account and $2,000 in the other this year.
Regular Savings Accounts
Unlike investment accounts that are earmarked for retirement, you can also set up a separate savings account that you plan to use for your retirement. It won't have the same potential for growth that a 401(k) or an IRA has because it is not tied to an investment portfolio, but you may be able to find a high-yield savings account at your bank or a credit union. The money you put into the account would come from income that has already been taxed, and your contributions to the savings account are not tax deductible. But it gives you a more liquid flow of money that you can rely on in your retirement. So, why not set up a savings account in addition to your employer-offered 401(k) and your IRA accounts, if you can?