According to a recent GOBankingRates survey, 81% of people across all age groups — that is, people age 18 and up — said they have $100,000 or less saved up for retirement. While this is a good start for younger individuals, people who are closer to their retirement years typically need substantially more money to be able to retire comfortably.
While you can start saving up for retirement at any age, the question is: Which decade is the most important when it comes to your retirement savings?
Well, it might come as no surprise that the sooner you can start saving up the better off you’ll be. After all, the earlier you get started, the more your money can grow throughout the course of your working years — and the more financially prepared you’ll be to retire.
GOBankingRates spoke with financial advisors and planners, Kendall Meade (CFP at SoFi) and Kim Gattis (senior vice president and manager of financial planning at UMB Bank) to get their thoughts on the most critical decade for your retirement savings.
Most Critical Decade for Your Retirement Savings: Your 20s
Both Meade and Gattis suggested that the most important time to start saving for retirement is in your 20s.
“It is important to focus on retirement at every decade, but I encourage you to start as soon as possible,” said Meade. “By beginning as soon as possible, you are able to contribute more to your retirement savings, but are also able to grow it more through the power of compounding.”
Gattis added, “While your retirement may not be your top financial priority while you are in your 20s, the financial foundation you build early in your working career is important and sets you up for growing your long-term savings and investments in later years.”
Plus, as Meade pointed out, by starting in your 20s, you won’t need to save up quite as much money to meet your retirement savings goals. If you wait until later in life — even if that’s just your 30s or 40s — you’ll need to increase your savings contributions to be able to “catch up” to you overarching retirement goals.
How Much People Have Saved Up in Their 20s
Although your 20s might be the most critical decade to start preparing for retirement, many people struggle to save up money during this time in their lives. According to the GOBankingRates survey, here are some key insights into people’s retirement savings (ages 18 to 24):
- 41% have no retirement savings
- 24% have $1 to $10,000
- 15% have $10,001 to $25,000
- 9% have $25,001 to $100,000
- 11% have $100,001 or more
And here’s how much people in their mid-20s to early 30s have saved up for retirement:
- 28% have no retirement savings
- 29% have $1 to $10,000
- 13% have $10,001 to $25,000
- 23% have $25,001 to $100,000
- 7% have $100,001 or more
The Longer You Wait, the More You’ll Need to Save
Even a couple of years can make a big difference when it comes to your retirement savings. So, for those who’ve waited to start setting aside money, they’ll need to calculate the cost of lost time.
“Small delays in saving can have a huge impact on your outcome,” said Meade. “Assuming a 7% return and a starting salary of $75,000 with a 2% increase per year, below are the balances you could have in your retirement account at 50 by contributing 15% beginning at various ages:
- Start at 22: $1,014,071
- Start at 25: $779,384
- Start at 30: $485,936
As you can see from this example, the person starting at age 30 will have less than half the amount of retirement savings as the person who started at 22 — assuming all else but age is equal.
You Should Save 15% of Your Income in Your 20s
If you start saving up in your 20s, it’s generally recommended that you save 15% of your gross annual income. However, you might need to increase this percentage if you want to retire early or if you start later, said Meade.
“You can do [this] in your 401k, an IRA, or even a taxable account for more savings,” said Meade. “In a 401k, the maximum amount you can contribute for 2023 is $22,500 ($30,000 for those over 50). The maximum that you can contribute to an IRA for 2023 is $6,500 ($7,500 for those over 50).”
Your Retirement Savings Goals Should Change As You Get Older
Ideally, your retirement savings goals will shift as you approach your 20s, 30s, 40s, and beyond.
“Planning and saving for retirement is a lifelong process and is complemented by your other financial goals throughout your life,” said Gattis. “Your individual goals and lifestyle choices mean that you may have a different retirement savings plan than someone else, but each decade in your life should include some type of long-term savings.”
In your 20s, Gattis suggested building an emergency fund with 3-6 months’ worth of living expenses. If your employer offers benefits like a 401(k) retirement plan, wellness incentives, or tuition reimbursement, take advantage of these as well.
In your 30s, Gattis suggested paying down any debts and focusing on building and using credit to meet any financial goals or needs you might have. Then, in your 40s, you can start planning out your current and future lifestyle goals — if you haven’t already. The following decades of life before retirement should be dedicated to planning and budgeting for your future retirement.
Ways to Catch Up with Your Retirement Savings
Even if you’re no longer in your 20s and your retirement savings aren’t where you want them to be, don’t fret. There are still ways to catch up or achieve your financial goals.
Here are just a few:
- Use tax-deferred or tax-advantaged accounts. “If you have access to accounts, such as HSAs, consider using this as a retirement savings vehicle,” said Meade. Rather than use an HSA to cover healthcare expenses, for example, Meade suggested reinvesting the funds so they can grow tax-free. During retirement, you can then use the money to cover healthcare expenses.
- Maximize your retirement account contributions. You can contribute a certain amount of money to your retirement accounts each year, so try to maximize your contributions. “For those who got started saving later, you may need to save more than what you can contribute to retirement accounts,” said Meade. “Any amount that you need to save above those amounts to reach your retirement goals can be invested in a taxable account.”
- Make a plan. If you already have a retirement plan, reevaluate it to make sure it still fits with your current savings and long-term goals. If you don’t have a plan, now’s a good time to make one. “One way to establish a sound financial plan is to work with a financial advisor, who can help you not only determine goals but work to make them a reality,” said Gattis.
- Save your bonuses and raises. Meade also suggested saving any additional money you receive, such as bonuses or raises. “Raises and bonuses are always viewed as positive, but if they are simply used to increase your standard of living, they actually make it harder to achieve financial freedom,” said Meade. “If you are playing catch up with your savings, it is critical to save most, if not all, of your raises rather than increasing your lifestyle expenses.”
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