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How to Save in Your 20s, 30s, 40s and 50s if You Want to Retire Someday

Articles with titles like “How Much You Should Have Saved for Retirement at Every Age” are super clickbaity and mostly depressing.

Sure, it’s easy for someone who doesn’t know me to say I should have two years of my salary saved, but they don’t know my salary, what I’m spending or what I want to be spending in retirement.

And frankly, neither do I.

So while this article will share general guidance for retirement savings goals based on this Fidelity chart, remember: These are only guidelines. Your retirement goals should be based on your own needs, priorities and financial situation.

Retirement planning isn’t one of those set-it-and-forget-it things. It doesn’t have to be hard, but you can’t do all the steps at once — which is great, because that would be pretty overwhelming.

Ways to Save for Retirement: 3 Common Retirement Accounts

First off, let’s not get bogged down by the terminology and acronyms associated with retirement.

There are three foundational definitions you’ll want to know in order to understand your retirement accounts.

1. 401(k)

This is a retirement plan offered by an employer. The name “401(k)” actually refers to the section of the tax code that allows your contributions to be deducted from your paycheck before taxes are taken out.

If you’re an employee of public schools or certain tax-exempt organizations, your employer may offer a 403(b), which is similar to a 401(k) but typically comes with fewer investment options.

Most 401(k) accounts offer a mix of the following investment options:

  • Stocks.
  • Bonds.
  • Mutual funds.
  • Index funds.
  • Variable annuities.

Depending on your workplace retirement plan, your employer may offer to match your contributions up to a certain percentage of your salary. (The maximum total combined contribution is $19,000 for 2019.)

What does that mean? Free money! If you make $40,000 and you contribute 5% of your pre-tax income to a 401(k), you’re saving $2,000 on your own.

And if your employer offers a 3% match, that adds an extra $1,200 to your retirement account. So it makes sense to take full advantage of this option.

2. IRA

This stands for individual retirement account. The most common types are traditional and Roth IRAs — both have great tax benefits and allow you to invest in the stock market, bonds, mutual funds, exchange-traded funds (ETFs) and certificates of deposit (CDs).

For 2019, your total contributions to all of your traditional and Roth IRAs cannot be more than $6,000 (unless you’re 50 or older; more on that to come).

Traditional IRAs are tax-deferred accounts, which means you get the tax benefits up front, but you’ll be taxed when you take the money out.

With Roth IRAs, you fund your nest egg with after-tax money. That means you don’t get the tax benefits up front, but you’ll get to withdraw your money tax-free in retirement.  

And if you’re wondering, there’s a similar after-tax contribution option in work-sponsored retirement plans — it’s called a Roth 401(k).

3. Taxable Account

This is a regular ol’ investment account without the tax benefits of the 401(k) and IRA. But what it lacks in tax benefits, it makes up for in flexibility.

You can open an account with any company and withdraw from it no matter what your age, for any purpose, with no penalties.

You will, however, need to pay income tax on money you withdraw, along with brokerage fees to your money manager.

What’s Another Way to Save For Retirement If Your Employer Doesn’t Offer a Plan?

If your employer doesn’t offer a 401(k), bring up the possibility of adding one. If cost is an issue, companies like SaveDay offer 401(k) plans at no cost to employers (and low fees for employees).  

But if you’re self-employed or you can’t get a 401(k) through your employer, you’re not off the hook. Contact companies like Vanguard, Fidelity or Schwab to open an account independently.

And if you’re on a high-deductible health insurance plan (and you meet qualifications), you can contribute to a health savings account, or HSA, which you can open with an HSA trustee. Contributions are deducted from your paycheck before taxes are taken out, and account balances above $2,000 can be invested just like they would be in a retirement account.

Your HSA can be used for any qualified medical expense at any time, and once you turn 65, funds can be withdrawn for any expense without penalty. At that point, you can put the extra money you save on health care expenses toward your retirement income.

You may also consider safer options than the stock market, like a regular savings account — although it will come with considerably lower annual returns. Even if you’re also investing, a savings account can be used as an easy place to stash your emergency fund.

How to Calculate What You Need to Save

Don’t stress too much about not having a specific target amount saved. You’re not alone.

Americans aren’t very good at saving for retirement — in fact, one-quarter of non-retired adults say they have zero retirement savings, according to a Federal Reserve 2018 report.

But how much money is enough money?  

Ask yourself questions like:

  • What is your anticipated retirement age? (Withdrawals from retirement accounts before age 59 ½ usually result in a 10% early withdrawal penalty.)
  • Where do you want to retire?
  • Do you want to pay off your house before you retire?
  • Do you have credit card debt, student loans and/or medical bills to pay off?
  • How frequently or far do you want to travel?

All these things (and more) will impact what you need to have saved for your retirement.

Know that your plans will change, and that inflation will make the things you want to do 3% to 4% more expensive every year on average.

You can run numbers through this retirement calculator, which accounts for taxes and inflation, so you can get an idea of how much money you’ll need to save.

Whatever you choose, it’s important to monitor your plan to ensure you’re on track for your retirement goals.

How to Save for Retirement at Every Age

You don’t have to have your entire life planned to start saving for retirement.

You actually don’t have to have anything planned or know much at all about the subject. But there is a rule that you can use to monitor your savings and to gauge your progress as you figure out where you’re going.

It’s called the 4% rule. The rule states that if you can live off 4% of your current retirement savings in a one-year span, your savings will likely last for at least 30 years. So if at any time you multiply your investment savings by 0.04 and you can live off that amount for the first year of retirement, you’ve arrived!

The 4% rule isn’t set in stone, and it doesn’t mean you’ll be living off that savings forever. But it’s considered a safe withdrawal rate by most professionals and is a good way to monitor your progress.

How to Save for Retirement in Your 20s

The most important thing to do in your 20s is to just start.

The math doesn’t lie; you can plug $100,000 into a compound interest calculator over different time spans, and the longest span of time will always produce the highest earnings. Starting with a zero balance and using 6% as an annual interest rate:

  • $417 a month for 20 years will grow to $184,000.
  • $278 a month for 30 years will grow to $263,000.
  • $208 a month for 40 years will grow to $386,000.

Even if you contribute small amounts, you should start saving for retirement in your 20s. Make it easy on yourself by automating your savings. If your employer offers a 401(k) match, sign up to deduct from your paycheck at least as much as the company matches.

If you don’t have a 401(k), open a Roth IRA online through a mutual fund company like Vanguard, Fidelity or Schwab and enroll in automatic contributions. Roth IRAs are amazing, but they do have income limits. It’s best to start one when you have a lower income.

And who has a lower income than someone in their 20s?

Also, the government will literally pay you to invest when your income is low. If you’re below a certain income, the Saver’s Credit allows you to claim between 10% and 50% of your IRA or 401(k) contributions — up to $2,000 per individual.

Savings Goal: According to Fidelity, by age 30 you should have saved the equivalent of one years’ salary.

How to Save for Retirement in Your 30s

Now that you have a few years of investing under your belt, it’s time to start optimizing your retirement savings.

Your next smartest move is paying off your debt. All the interest and fees you’re paying eat away at the amount you’re able to put toward retirement. And now that you’ve probably settled into a career and are getting raises, it’s time to double down and eliminate that debt.

If you didn’t open one in your 20s, open a traditional or Roth IRA and start maxing it out.

Because IRAs have a low limit and you never get those years back, start maxing out your IRA as soon as possible. The type of IRA you contribute to is up to you.

A traditional IRA lowers your taxable income, so if you’re within $6,000 of the next-lowest tax bracket, you can use a traditional IRA to slide in there. If you’re content with your tax bracket, you might like a Roth IRA, which won’t lower your tax bracket.

Savings Goal: According to Fidelity, by age 40 you should have saved the equivalent of three years’ salary.

How to Save for Retirement in Your 40s

If you’re in your 40s, there’s a good chance you have kids, a house and a stable position in your company. You might start thinking about getting a new car, upgrading the kitchen or maybe getting that boat you’ve been eyeing for the past 10 years.

Now is not the time to start giving in to lifestyle inflation. You’re at a critical time when your investment returns are ideally going to start outpacing your contributions every month, and it’s time to capitalize on that!

It’s also time to figure out what you want to spend in retirement. Now that you have perspective on life, retirement and investing, you can plan a more reasonable retirement budget and figure out how long it will realistically take you to get there.

If your plan includes increasing your savings rate, start working toward maxing out your 401(k). If you don’t have a 401(k), open a taxable account and contribute there. You can usually do it at the same place you have your IRA.

Savings Goal: According to Fidelity, by age 50 you should have saved the equivalent of six years’ salary.

How to Save for Retirement in Your 50s

At age 50, you can take advantage of catch-up contributions to your 401(k) and IRA — even though you won’t need to, because you’ve been on track for decades.

As of 2019, you can put an additional $1,000 per year in your IRA and $6,000 per year in your 401(k) once you reach 50.

Annual Contribution Limits

Under 50 50 and older
IRA $6,000 $7,000
401(k) $19,000 $25,000

It’s also time to start thinking about Social Security. The longer you wait to collect, the more you’ll get each month. Look back at the 4% rule in order to plan when you want to start collecting.

Finally, it’s time to get a financial adviser. Most people who try to start with getting a financial adviser get frustrated when they pick the wrong one, because they didn’t know what they wanted in the first place.

Now that you have a significant amount invested and an idea of what you want to do with it, it’s time to find an adviser with expertise in how to do that. They can help you optimize the final years of your contributions, protect what you already have and make a withdrawal plan that’s more accurate than the 4% rule.

Savings Goal: According to Fidelity, by age 60 you should have saved the equivalent of eight years’ salary.

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