Financial obligations accumulate quickly: College debt, marriage, buying a first home, children’s college expenses and support to aging parents strain bank accounts. It’s no surprise then that a U.S. Government Accountability Office analysis found that almost 30 percent of Americans age 55 or older have no retirement savings or pension plan.
For recent graduates and millennials, these baby boomers who don’t have retirement savings serve as a cautionary tale. The younger you are when you begin retirement planning, the easier it is to save more money and the more comfortable you will be later in life. If you’re approaching 30, here are a few critical but simple retirement planning factors to keep in mind if you want to save more than $1 million by the time you retire.
Small Amounts Matter
Before you turn 30, you are in the best position to start planning for retirement, but you are also the least likely to consider doing so. According to Sophia Bera, a certified financial planner and founder of GenY Planning, 42 percent of Gen Yers are concerned with paying off student loan debt, implying that planning for retirement is less of a priority. Similarly, millennials are more concerned with avoiding credit card debt than they are with thinking about their twilight years; according to a CreditCards.com report, 36 percent of respondents ages 18 to 29 said they have never had a credit card.
While paying off student loans and avoiding new debt can be good financial habits, not prioritizing retirement planning can be a big mistake. People under 30 have time for their wealth to grow, and putting aside a small amount of money each month now can result in a big nest egg later. Many personal finance experts recommend saving 10 percent of each paycheck.
Use Age and Interest Rates to Your Advantage
Charlie Shipman, managing principal at Blue Keel Financial Planning, works with Gen Xers and millennials and recommends starting a retirement plan early with a small monthly savings amount of $100. “Such a small amount can be easily be compared to a cable bill, gym membership or one night of dinner and drinks,” he said.
“Assume a rate of return of 8 percent … the average for the stock market,” Shipman said. “A person in their 30s will end up with over $200,000 at retirement. A person in their 40s will have just under $100,000 after 25 years, and a person with 15 years until retirement will only have about $35,000.”
By saving and investing when you’re young, your money can grow exponentially over time because of compound interest. The longer your money gathers interest, the better. Waiting just five to 10 years can significantly impact your savings. “A retirement plan saving $350 per month at age 25 and increasing that savings amount by 2.5 percent per year … earning a non-guaranteed 7 percent return … would have about $1.4 million at age 67,” said Jeffrey Bogart, registered investment advisor and president of Sila Wealth Advisory.
“If that same person waits to age 35 to start saving … they would have about $654,000 at age 67, so waiting 10 years costs about $754,000,” said Bogart. “If someone who is 35, who is just starting to save and wanted to have that same $1.4 million end amount, they would need to save $725 per month, while a 45-year-old would need to save $1,850 per month,” he said.
Don’t Ignore Corporate Benefits
One key to retirement saving is corporate benefits. “Have a percentage of each paycheck, rather than a dollar amount, contributed automatically to your 401(k) or other employer-sponsored retirement plan”, said Shipman. This way, the amount that you save will grow along with your salary.
The average employer using a retirement plan from Fidelity Investments, the largest U.S. retirement plan provider, now contributes about $3,600 per year to an employee’s retirement account, which is up from $2,800 in 2007, according to Bloomberg. Find out how much of your salary contributions your company will match and contribute at least that amount. Otherwise, you are “leaving free money on the table,” said Shipman.
Consider a Roth 401(k) if you have money left over that you would like to save. A Roth 401(k) account can allow funds to be withdrawn tax-free during retirement, and it is a relatively safe investment.
Customize Your Strategy
When you’re in your 20s, you have the luxury of time when it comes to retirement savings, and you can assume more risk because you have time to recover any losses you might incur. Millennials tend to pick more individual stocks based on brands they’re familiar with than older generations but generally create well-diversified portfolios, according to U.S. News.
As you diversify and take on risk, remember to factor in how much time you have until retirement. It is possible to be too conservative with your investments, especially in your 20s.
Keep Reading: How to Start Investing in Your 30s