When you’re new to the workforce, retirement savings advice can seem unrealistic. According to many experts, by age 30 you should've saved between 50% and 100% of your annual salary for retirement. But that can seem like an impossible amount at a time when you may just be beginning to settle into your career and you have more pressing financial goals, like paying down student debt, financing a wedding, or saving for a down payment on a home. You have the rest of your career to save for retirement, so why can’t you postpone when to start saving for retirement?
According to many experts, by age 30 you should've saved between 50% and 100% of your annual salary for retirement.
Saving the right amount for retirement is complicated and it can be difficult to answer the question: When should you start saving for retirement? You have immediate goals that you need to meet, like paying off student loans, and you want to enjoy your life too. That’s perfectly understandable. But saving for retirement is a marathon, and time is of the essence. The power of compound interest means that any money you save now will be worth much more by the time you retire. If you wait too long to start saving, you could find yourself investing twice as much and still not catching up.
So, the answer for when to start saving for retirement is now. But the amount doesn’t have to be huge. You can start by investing a small recurring amount in a retirement savings vehicle, while continuing to focus primarily on your other goals. If you invest continuously, even if it’s a small amount, over time you can build valuable savings without disrupting your lifestyle now.
If you have debt you’re working to pay down, you can increase the amount you’re contributing to your retirement savings as your debt gets smaller. Once you’re in a rhythm of making payments, consider how to best allocate the amounts. Put more than the minimum toward debt in order to stay ahead of the interest, and put at least a minimal amount toward retirement to get started on the right track. You can start small by putting 1% of your pay toward a retirement fund, then aim to increase it one percentage point at regular intervals. The easiest way to do this is to automate deposits directly from your paycheck.
If your workplace has a 401(k) matching program, you should contribute at least enough to get the full company match. This is your minimum. A 401(k) match is extra money on top of your salary, and while you can’t predict the rate of return on your investments, the matching funds from your employer can be a significant “guaranteed” return. Even if you can’t afford to save anything else for retirement, commit to investing enough to get this match.
Another option is a Roth IRA, in which your contributions are made after your income is taxed. Your savings then grow tax free over time. These accounts can be a good option for early-career professionals who expect to be in a higher tax bracket later in life. There are income limits that determine who can qualify for a Roth IRA, and annual contributions max out at $6,000 per year, based on 2020 limits, but most younger investors will find a Roth IRA a worthwhile investment.
Please consult your tax advisor for additional information.
Saving for retirement isn’t easy. It’s even harder when you’re trying to pay off student loans as you save. Remember that progress is made over time, so the earlier you start, the greater the future growth of your savings. Do what you can, and be realistic. You don’t need to sacrifice important life moments and experiences in order to reach your savings goals. Just save at least the minimum to get the full company match on your 401(k), and recalibrate your retirement contributions whenever you can.