Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.
When it comes to saving for your retirement, there's no such thing as being too fussy. You may have to live off your nest egg for more than 20 years if you retire at 65, according to data from the Social Security Administration, and that means keeping your powder dry through every stage of your life.
In order to chart the smoothest course to a worry-free retirement, you need to adapt your saving priorities to what's going on in your life and the financial markets in general. While we can't predict the future, we can offer some evergreen tips on how to maximize your retirement savings for each decade of your life, as well as give some pointers you should be following no matter how old you are.
How to save for retirement in your 20s
You may feel full of vim and vigor in your 20s, with the last thing on your mind being how to afford your osteoporosis medication half a century from now. However, your 20s is the time to lay the foundation for life's most important vacation — retirement. To start building your retirement nest egg, you should:
- Maximize employer-sponsored retirement accounts
- Open up your own individual retirement account (IRA)
- Figure out how much of your income per year you can save
Maximize employer-sponsored retirement accounts
Not all American workers can count on employers to provide a retirement saving option. According to data from a recent Stanford study, 46.5% of employees aged 25-34 can sign up for an employer-sponsored savings plan. One of the most popular is the 401(k), a special tax-advantaged account where you can place a portion of each paycheck. What's so great about a 401(k)?
- You don't pay taxes on money saved in a standard 401(k). The money you place in a standard account comes straight from your paycheck before taxes. You pay taxes when you withdraw money from the account, which you can do without penalty starting at age 59 ½. If you have a Roth 401(k), you pay taxes on the money you contribute to the account, but don't pay taxes when you take your withdrawals.
- Your employer contributes matching funds to the account. While not guaranteed by law, many employers will match what you contribute to the 401(k), up to a certain limit that's determined by them. "Save at least what your employer will match into your 401k," says Laura C. Nickolay, a CFP based in Minnesota. "It's free money!"
If you begin feeling overwhelmed by the number of decisions you have to make regarding your 401(k) investments, the simplest solution is to choose a target-date retirement fund. Basically, you choose one of these funds based on what year you would like to retire and the allocation of your investments will adjust based on how close you are to your target year—the further away you are, the more aggressive your investments (aggressive meaning riskier stocks as opposed to safer securities such as bonds).
This is a good way to get started, but keep in mind the target fund may not match your exact preference regarding the aggressiveness of your investments—you should always pay attention to how your retirement savings are growing to make sure it aligns with your goals.
Open up your own IRA
This piece of advice doubles in importance if you don't have a 401(k), but even those lucky enough to have one should supplement their employer-based retirement account with an IRA that doesn't depend on your boss.
IRAs are either deposit accounts held at a bank (such as a savings account or a money market account) or investment accounts at a brokerage. Similar to a 401(k), funds you place in certain types of IRA, including any returns from investments, avoid taxes. The two main types are:
- Traditional IRA: Any funds you place in a Traditional IRA are tax-deductible and tax-deferred, meaning it isn't taxed by either your state or the IRS until you begin taking withdrawals, which you can do without penalty at age 59 ½. For 2019, you may contribute up to $6,000 per year to the IRA, or $7,000 if you are aged 50 or older IRS.
- Roth IRA: The money placed in a Roth IRA is subject to taxes can't be deducted from your taxes, however, once the money is in the IRA, any growth from the interest earned on a Roth IRA savings account, for example, is protected from taxes. When you begin making your withdrawals, you aren't subject to an additional tax, provided you are 59 ½ and have had the IRA for at least five years.
Unless you're pulling down a six-figure salary in your 20s, then you should opt for the Roth IRA. "For a younger or lower income worker, the Roth tends to make more sense since your tax rate is low now, but is expected to be higher in the future due to higher income," said Carl Holubowich, a CFP based in Washington D.C. "So you pay taxes at today’s lower rates."
Figure out how much to save
Tax-deferrals and employer matches may be great, but saving for retirement only works if you stick with your decision to build savings. There's no magic number that fits for everyone, but experts generally say you should aim to put away a certain percentage of each paycheck into savings when you're starting out, from 10% to 20%.
Your overall goal will be to amass around 25 times the annual income you expect to need in retirement (to use one common benchmark). Even if you were to estimate your annual expenses at a modest $30,000 a year, that means saving $750,000 before you can even think of putting work in your rearview.
At this point in your savings journey, the most important thing is to keep saving any amount, even if it is less than you projected. "Youth has a superpower, and it’s called compounding interest," said Michelle Buonincontri, a CFP based in Arizona. "It’s not how much we save but for how long that really matters."
How to save for retirement in your 30s
You may have started noticing a few wrinkles here and there, but your retirement savings should proceed full steam ahead. Your 30s can introduce a whole bevy of big changes that can make or break your retirement savings, so make sure you:
- Invest your savings aggressively
- Avoid taking on unmanageable debt
- Shore up your emergency fund (or get started on one if you haven't already)
Invest your savings aggressively
While any kind of saving is better than nothing, you ideally want to put your money somewhere it can grow quickly. At this point in your career, you shouldn't be investing too much of your money in bonds or money market mutual funds, which carry very little risk but also not much opportunity for growth. If you are investing in a target-date fund, make sure the allocation of investments is still aggressive enough.
Avoid taking on unmanageable debt
The key word here is "unmanageable." During your 30s, you may take on some huge, life-changing financial responsibilities, such as buying a home, getting married or having children. Remember, while you can finance a home purchase with a mortgage or get an auto loan to pay for the minivan you need to get the kids to soccer practice, you can't take out a loan to fund retirement.
To avoid biting off more than you can chew with unsustainable debts, consider dialing back the amount of income you dedicate to retirement savings. "If you're still trying to max out your retirement accounts, it's going to feel really tight on the budget to maintain child care and home maintenance," said Joy Liu, a financial advisor based in New York. With luck, the aggressive saving you undertook in your 20s can help you avoid losing too much ground if you have to slow things down a little.
Shore up your emergency fund
You're getting older, and that means you'll also have to weather the unforeseeable disasters life has in store for you. Whether it's a serious illness or an exploding furnace, calamities can strain your finances, which is why most financial advisors recommend that you have an emergency fund.
Dedicate an hour or so to figuring out your monthly expenses. How much do you pay for food, transportation, housing, entertainment — all the necessities. At a bare minimum, you should have enough in your emergency fund to pay for three months’ worth of expenses, and probably double that if you have family members depending on you financially.
How to save for retirement in your 40s
Avoid feeling middle-age rage about your retirement savings by following these tips for what you should be doing during your prime earning years.
- Don't let paying for your children’s education wreck your retirement
- Check up on your investments
- Avoid inflating your lifestyle
Don't let education spending wreck your retirement
The burden of America's staggering student loan debt falls on more than just recent college graduates. According to a report by the Guardian Life Insurance company, 70% of parents plan on tapping some of their retirement savings in order to help pay for their children's college education. If you plan on helping fund your child's higher education, make sure it doesn't come at the cost of your hard-earned retirement.
The Department of Education provides a helpful guide on the basics of student loans, but the "too long, didn't read" overview is that you should exhaust your options with government student loans before turning to private student loans, which generally carry higher interest rates and have less flexibility with repayment plans.
Perhaps most importantly, make this financial burden a teachable moment for your child. Rope them into the process and make sure they're doing everything possible to earn merit scholarships that can reduce the amount of debt the whole family takes on.
Check up on your investments
You should continue to invest aggressively in your 40s, as you still have a couple of decades before you reach retirement and can make up for any market downturns. In fact, you may need to tweak your investment allocation if you have target-date funds, which tend to become more conservative (i.e., a higher percentage of your investments are bonds or other short-term investments) the closer you get to the target date.
That may be exactly what you want, if you feel a conservative approach will allow you to reach your savings goal in an acceptable time frame. But just be aware your investments may no longer sync up with your plan. "A lot of target date funds assume you will cash out the whole thing [on the target date] and are more conservative than they need to be," said Liu. "When retirement is still 10 or more years away, we still recommend an investment ratio of 90% stocks and 10% bonds."
Avoid lifestyle inflation
Hey, we get it — you're earning more money than ever and that 1968 Ford Mustang is finally within reach. But don't succumb to the temptation to squander today's earnings at the cost of tomorrow's retirement. If you had to cut back on how much money you dedicate to retirement savings in order to pay for a house or other major lifestyle changes, now's the time to max out your accounts again.
How to save for retirement in your 50s
Retirement is so close you spend your lunch hour browsing fanny packs and your evenings pairing which socks look best with your sandals. You haven't reached the finish line yet, but these pointers should help you finally make it to the promised land.
- Start downsizing
- Play catch up with your savings (if you need to)
- Keep saving
Now that your target retirement age is potentially only a few presidential administrations away, you can more accurately take stock of how expensive your retirement will be. "Think about what you want your retirement to look like, how you want to spend your time and your money and what your budget will be," said Katrina Soelter, a CFP based in Los Angeles. " Be prepared to find the best compromises that help you live a life you love while still maintaining financial security, so you don't have to feel worried about your future." You should seriously consider if you need to still live in a six bedroom house now that your children are in college (as an example) or if you still need to live in that amazing school district that also has sky-high property taxes.
Play catch up with your savings
If you've been following your retirement plan during the previous decades, you should be able to skip this step, but life has a way of not caring about your designs. If you look at your savings and feel you can't sock away enough money in time for your goal retirement age, consider taking advantage of the higher contribution limits you can make to IRAs and 401(k)s. Keep in mind these limits are for 2019 and can change from year to year, but the most up-to-date information can be found on the IRS's website.
- IRAs: If you are over 50, you can contribute $7,000 each year to a Traditional or Roth IRA versus the $6,000 the government limited you to when you were younger.
- 401(k)s: You now can contribute an additional $6,000 a year over the annual limit set on 401(k) contributions — for 2019, that's $19,000.
Even if you don't have to play catch-up with your retirement savings, you should still be earmarking a percentage of your income for retirement. After all, there's no law stating you have to start taking distributions from your retirement accounts once you hit the qualifying age of 59 ½, and you want to remain ready for any sudden disruptions in your income streams.
"Many people in their 50s go through career changes and its best to be prepared to ensure your retirement savings continue through earnings changes," said David Haas, a CFP in New Jersey. "While financial planning is important at any age, it can be particularly important in your 50s so you could make sure you have enough put away for the retirement you want."