Many things change as you get older, but at least one thing stays the same: the importance of saving for the future.
How much you should save can feel like a mystery, though. And life doesn’t always go according to plan.
The concept of building savings has become top of mind for most people over the last few months, says Dan Keady, chief financial planning strategist at TIAA. For people who have been laid off, saving for retirement may feel like a pipe dream. “Even for those who haven’t been overly impacted financially, it still has had a huge impact in the way they’re looking at things,” says Keady.
With travel, concerts, and other pricey activities virtually canceled, “a lot of my clients in their 30s-50s are finding they’re not spending as much money,” says Joelle Spear, CFP, financial advisor, partner, Canby Financial Advisors. They want to learn what they can do with the excess cash.
If you had savings goals to reach at different ages, it could help guide and motivate you to figure out how much to set aside.
Saving For Emergencies And Retirement
When financial experts use the word savings, they’re usually referring to two types: retirement savings and emergency savings. They serve very different purposes, so it’s important to build up both.
The concept of emergency can be misleading, says Keady. “An emergency makes it sound like it doesn’t often happen. In reality, in people’s finances, things go wrong, and they have to dip into their savings or emergency fund.” He says the goal of an emergency fund is to prevent creating credit card debt to pay for unexpected “spending shocks.”
Start early, stay consistent, and don’t get discouraged. Even setting aside $20 a month will add up and make a difference.
No matter what you call it, an emergency fund is meant to be readily available for immediate use. A retirement fund, on the other hand, ideally remains untouched until you’re ready to retire. Typically, your retirement fund is invested in an account like a 401(k) or a Roth IRA so it can grow.
“We seem to consistently forget that when you pick investments in your 401(k) or your IRA, you are investing. You are an investor. We forget it because we use the wrong language. People say ‘saving’ for retirement, but you’re not saving, you’re ‘investing’ for retirement. And that’s a really critical difference,” says Erin Lowry, author of the “Broke Millennial” book series.
Savings Goals By Age
The numbers in this chart are meant to serve as benchmarks and are based on expert guidance, national income medians, and common “rules of thumb” such as Fidelity’s retirement guidelines. The numbers are also meant to be goals you achieve while you’re in that age group, not by the time you reach it (i.e., aim to have $22,000 for retirement by the time you’re about to turn 30, not when you turn 20). The retirement numbers don’t take into account expected investment growth (typically 6%-7%). This table should serve as a guide rather than an exact target.
|Age Group||Retirement Savings||Emergency Savings||Factors|
|20s-30s||1x your current salary, or $22,000-$40,000||1 month of expenses||Compound interest isn’t on your side yet. Your starting salary is likely too low to be saving a substantial amount, but forming the habit is important.1 month of emergency savings is the bare minimum. Try to build that up more if possible.|
|30s-40s||3x your current salary, or $126,000-$253,000||3-6 months||Earnings is typically higher in your 30s.Compound interest will help your saving grow faster. Expensive decade if you buy a house, start a family, or make a career change.|
|40s-50s||6x your current salary, or $300,000-$330,000||3-6 months||Prime earning years. Aim to set aside at least 20% of your salary for retirement savings.|
|50s-60s||8x your current salary, or $330,000-$432,000||3-6 months||Prime earning years, but life is also probably pretty expensive.Continue to prioritize your savings because retirement isn’t far off.|
|60s-70s||10x your current salary, or $540,000-$720,000||6-9 months||By now, you probably have a good idea of what retirement will look like. Take stock of your nest egg and get excited!|
Make It Personal
“People love a benchmark, but personal finance is personal. So don’t allow benchmarks to discourage you. It’s really getting started and being consistent that matters a lot,” says Lowry.
If someone asks Lowry how much they should have saved for retirement, she says she will answer with more questions. “Because as with all things personal finance, the answer is, ‘it depends.’”
Countless factors will determine how much you can save, especially for retirement. Your income, lifestyle, employer benefits, and retirement goals are some of the big ones.
Get To Know Yourself
“How much do you reasonably need for the type of lifestyle you want to have in the future? At what age do you want to retire? What does retirement look like for you?” These are just some of the questions Lowry recommends you answer before crunching the numbers to develop a retirement goal.
There are many simple calculations to help you get started, like the “multiply by 25” rule or the “4%” rule. A financial planner can also be a great resource for developing a personal financial plan and creating a nest egg goal.
Of course, it can be hard to envision what your long term goals are when you’re only 20. Instead of accurately predicting your life 40+ years from now, Lowry says, “it’s about giving yourself options.”
Start Early, Save Often
“When you are in your 20s and 30s, really the big asset you have is time. The longer your money can be invested in the stock market and compounding for future growth for the future you, that’s one of the best gifts you can give yourself financially,” says Lowry. That’s why even if you have other debt to pay off, you shouldn’t wait to start building wealth.
One reason it’s so important to start early is because of compound interest. This is especially true with a retirement fund or other invested savings. To see how much of a difference starting early can make, play around with this compound interest calculator.
Starting early is also about building habits and learning about your finances. Spear remembers an invaluable piece of advice from her first boss: “you won’t miss what you don’t get used to spending.” By starting early, you’re creating permanent habits.
Even if your starting salary isn’t enough to save a lot, start with a small amount, even $20. Then, try and increase that amount by 1% every six months, advises Lowry. “You’ll barely feel a difference in your paycheck.”
Where To Keep Your Money
You want to keep an emergency fund liquid, meaning it’s available to withdraw at any time, so a savings account is a great option. To maximize your savings, you can look into a high-yield savings account, where you’ll earn more interest than with a traditional bank.
Luckily, your retirement fund doesn’t need to be liquid, so you can invest it. One of the biggest mistakes Keady sees is people being too safe with their retirement funds, especially when they’re just starting out. Instead, he recommends putting your money in a target-date fund or working with an advisor to create a personal portfolio. And of course, if your employer offers a 401(k) match, you should try to max that out as soon as possible.
The Bottom Line
“Savings comes in phases,” says Spear. Life will always have big expenses, like going to college or buying a house. “As your income creeps up, you tend to spend more money, so I encourage people to save more.” However, you work hard for your money, says Spear, so don’t be afraid to enjoy it.