In your 20s, as you start your career and make real money for the first time, your spending changes. After living with Mom and Dad or in a college dorm, you can afford a place of your own and might want to splurge on the place with the amazing rooftop deck. You might have some disposable income for the first time — even after making the monthly payment on those student loans — and want to take a weekend trip each month with friends.
Before signing that apartment lease or booking a hotel for that getaway, don’t forget to add one monthly “bill” into your budget: a contribution to your retirement account. The best time to start saving for retirement is when you start earning.
How much you should save depends on the type of life you want to lead later. Do you envision yourself as a world traveler when you retire or a homebody? Setting goals and milestones to reach at ages 30, 40, 50 and 60 will help you have money to live when you no longer bring in that weekly paycheck.
There isn’t one recipe for success when it comes to retirement planning. Each plan is unique, depends on your lifestyle and is best designed with the assistance of a financial planner. Still, some general guidelines do exist.
Age 30: The 1X Recommendation
By age 30, you should have saved an amount equal to your annual salary for retirement, as both Fidelity and Ally Bank recommend. If your salary is $75,000, you should have $75,000 put away. How do you do that?
“When starting your career, commit to automatic savings of 20% per year into your 401(k). It will discipline you to live and give on the remaining 80%,” said Jason Parker of Parker Financial in the Seattle area, author of “Sound Retirement Planning” and host of the “Sound Retirement Radio” podcast.
Age 30: Planning Starts in Your 20s
Many Americans don’t sign up for a 401(k) in their 20s, meaning they aren’t taking advantage of a potential employer match.
“An employer match on your 401(k) is free money, but roughly a quarter of employees are leaving free money on the table by not taking advantage of their match,” said Brian Walsh, a certified financial planner and financial planning manager at SoFi.
He added that in some cases, planning for retirement can trump paying down debt.
“Many young people we work with hate being in debt and strive to pay off their debt as quickly as possible,” he said. “That is admirable, but sometimes it simply does not make sense to aggressively pay down debt instead of saving. While eliminating debt is important, you also need to prioritize saving for your future. We consider any debt with an interest rate below 7% to be good debt and suggest saving some of your money before aggressively paying that debt down.”
Age 40: The 3X Recommendation
Both Fidelity and Ally Bank recommend having three times your annual salary put away for retirement at age 40. If you don’t have a retirement savings strategy as part of your overall financial plan by this point, don’t delay, one expert said.
“Every household, regardless of their net worth or stage of life, owes it to themselves to create a comprehensive, individualized financial plan,” said Drew Parker, creator of The Complete Retirement Planner.
Age 40: Resist the Temptation
“The most common mistake is that people let their spending increase commensurate with their new salary. For instance, people move into a bigger apartment or buy a more expensive car or home to reward themselves for receiving the raise,” said Dr. Robert R. Johnson, a professor of finance in the Heider College of Business at Creighton University. “What happens is they are unable to improve their financial condition because they spend everything they make. People are wise to effectively invest any money from a raise as if you didn’t receive the raise. That is, continue to live the same lifestyle you led before receiving a raise and invest the difference.”
“An example will help illustrate how investing a raise can help build true long-term wealth. Suppose one receives a $5,000 annual raise early in one’s career. If you simply invest that $5,000 annually into an investment account growing at a 10% annual rate, you will have accumulated over $822,000 in 30 years.”
Age 50: The 5X Recommendation
Ally Bank recommends that 50-year-olds should have five times their annual earnings saved, while Fidelity is more aggressive with a recommendation of six times the salary.
If you find that you’ve fallen behind in your retirement savings as money was diverted to other expenses — such as college tuition for your children — you can make a “catch-up contribution.” Once you hit 50, you can make an extra contribution to a tax-advantaged retirement account each year. The Internal Revenue Service determines the amount, which is $6,500 in 2021. That is a per-person figure, so couples can double the contribution.
Age 50: Cut Costs
When you hit 50 — or in the first few years of that decade — your children might be out of the house and you might not need that four-bedroom Colonial anymore. It could be time to downsize. If you’ve owned your home for years, chances are you could be sitting on some equity you can put away for retirement. Or, with today’s attractive interest rates, you could buy a less expensive home and slash your monthly mortgage payment.
And if you haven’t already done so, Walsh advised reviewing the fees you pay to maintain your retirement account.
“Fees impact every age, but as you get older your balance will start getting larger and those fees will really add up,” he said. “Let’s face it — fees are confusing and many average investors do not truly understand what fees they are paying. A fee of 1% or 2% may seem like a small number, but that is $5,000 to $10,000 a year if you have $500,000 saved up. Rather than paying high fees for your investments, consider using an active investing product that allows you to buy and sell investments on your own without paying commissions or an automated investing product that invests your money for you while charge no advisory fees.”
Age 60: The 7X Recommendation
By age 60, you should have seven times your annual earnings saved for retirement, Ally Bank recommends. Fidelity, once again, is more aggressive and recommends eight times the amount.
This is also the time to make a push toward paying off debt to enter retirement owing the minimum amount possible. Live within your means and pay off bills, especially high-interest credit card debt. If you don’t, those monthly payments will eat into your retirement savings later on. Doing so will also increase your credit score and lower your credit utilization rate, which will make it easier to refinance your home at a lower interest rate.
Age 60: Reduce Risk
Johnson said people within five years of retirement — so no later than their early 60s — should begin to minimize the risk to their retirement accounts.
“A large downturn in the market immediately preceding retirement can have devastating effects on an individual’s standard of living in retirement. The exact time a person retires can have an enormous impact on the quality of their retirement if their assets are focused in the equity markets,” he said. “Take, for example, someone who retired at the end of 2008. If they were invested in the S&P 500, they would have seen their assets fall by 37% in one year. The five years prior to retirement can be considered the ‘retirement red zone.’ And, just as a football team can’t afford to turn the ball over and fail to score points when inside the opponent’s 20-yard line, the retirement investor can’t afford a big downturn in the retirement red zone.”
