How to get started in your 20s, 30s and 40s
Haven't Saved for Retirement?
by Eric Hutchinson
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Getting started on your retirement savings starts with choice and commitment. It is a choice to set a little aside for the future, for the proverbial "rainy day." Having made that choice, it then takes commitment to keep the momentum going. Ideally, saving becomes a habit, a mindset that guides future decision making about money.
To get started saving for retirement or anything else, start with first things first and that's emergency cash reserves. A good rule of thumb is to have three to six months' worth of living expenses set aside in readily available cash form. This might seem like a big hurdle if you have no savings at all. So, start with a plan to build to an amount you can imagine as possible. If you are starting at zero, maybe $100 or $500 is a good goal. Upon reaching that goal, maybe you increase to $1,000, then $5,000, then $10,000 and so on to whatever amount you need that represents three to six months' worth of living expenses.
Once you have laid a solid foundation for handling life's little emergencies by accumulating a cash cushion of adequate emergency cash reserves, you are now ready to consider saving for retirement.
Most often, the best options for retirement savings are available through your employer. Your workplace may offer a retirement plan with names like 401(k), 403(b), 457, SIMPLE IRA, or SEP. These are all different forms of employer sponsored retirement plans and whatever your employer offers will be a great place to start. Any of these plans will allow you to contribute money from your paycheck automatically each pay period, making it a very easy way to save systematically for your retirement.
Your contributions are generally made pre-tax, that is before income taxes are taken out of your earnings. By making a contribution to your employer's retirement plan, you actually lower your taxable income. This may even move you into a lower income tax bracket, meaning you pay less in income taxes, save for your own retirement, and still have a take home pay that is almost what it was before you decided to save for your retirement. Of course, you will pay income taxes on withdrawals from these retirement accounts, but that comes much later in life as you actually retire and begin using this money to support your lifestyle when you no longer get a regular paycheck. There are also penalty taxes for withdrawing money too early, so this type of savings needs to be totally earmarked for retirement.
Your employer's retirement plan may offer matching funds to help you save even more for your retirement. This is free money! This is extra money set aside by your employer to give to you, over and above your regular paycheck. However, typically the only way you get this free money is to contribute to the retirement plan. I always advise setting a goal to contribute at least enough to qualify for the matching funds.
So what happens if you haven't started yet? Here are my tips for starting your retirement savings in your 20s, 30s or 40s:
In your 20s, you may be starting a family, acquiring your first home, furnishing that home, and building your lifestyle to suit you. Even with all these things tugging at you, you can still get started saving for your own retirement. Start small if you need to, but start. Stay committed to continuing to save. Even if you only set aside one dollar, that is more than you were saving before. If you saved one dollar every day, you would have 365 dollars saved by the end of a year and you would be well on your way to forming the habit of saving. The next year you can set a goal of a little more and keep increasing little by little until you reach your savings goals.
In your 30s, you may be getting fairly established, but children can be taking an increasing share of your income to meet their needs. If you haven't already done so, this would be a good time to sit down with a financial adviser to make sure you are using your employer's retirement savings plans effectively.
In your 40s, you are probably beginning to "hit your stride." You have advanced in your career, you are earning more than you did in your 20s and 30s, but life has a way of steadily increasing demands on both your time and your money. If your 40s, you should maximize your contributions to your retirement plan. Increasing paycheck contributions in small increments can make growing your retirement savings nearly painless. Increase your contributions by 1% or 2% and you probably won't even notice the change in your net paycheck. Do that again in six months or a year and keep doing that. Keep increasing in small increments, and before you know it, you will be maximizing your contributions. If you know you are about to get a raise, bonus, or promotion, consider bumping your contributions even more.
If you have maxed out your retirement savings in your employer sponsored retirement plan, you can then look at other options and savings vehicles. There are Individual Retirement Accounts (IRA) and ROTH IRAs. Depending on your total household income, you may be able to deduct contributions to IRA plans, but you are limited to contributing no more than $5,500 per year per person plus an additional $1,000 per year as a "catch up" contribution for those over 50. The same limits apply to ROTH IRAs, but contributions to ROTH accounts are put in on an after tax basis, and then withdrawals are generally tax free.
No matter what decade you get started, if you can make the choice to begin saving for your future, back that choice with a strong dose of self-discipline and commitment to stick with it until saving a portion of everything you earn is second nature habit for you. You will emerge one day as a financially independent person that enjoys complete peace of mind about personal financial matters. You will be confident about your future and feel secure that you can live your life on your own terms without worry.
Eric Hutchinson, CFP®, has over 30 years of experience in the areas of financial planning, investments, estate planning, and tax planning. Hutchinson is the author of The Financial Briefing: Answers to Life's Most Important Questions (Advantage Media Group, May 2016) and has been featured on Bloomberg in New York and in The New York Times, Forbes, Consumer Reports, InvestmentNews, the Arkansas Democrat-Gazette, and more. For more information, visit TheFinancialBriefing.com.
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