I didn’t start saving as early as I wish I had. I started working at a young age and held multiple jobs in my teens and 20s, but I never had a plan to save for my future. I accrued a few 401(k) accounts from previous jobs, but I never actively saved.
By the time I started to focus on my future, I knew I was behind and that hitting future savings goals would be an uphill battle — but because I’ve taken certain steps, I’m now making progress toward my financial goals. If I'd listened to all the rules about how much to save, I might have given up for no reason.
If you’re in your early 20s and are wondering how much money you should have saved before you turn 30, this article is for you.
If you’ve entered your 30s and feel you’re now too far behind, this article is equally as relevant.
It’s not too late to start your retirement planning and begin saving for your future. Let’s look at how much money you should have saved by 30 and what money moves you could make starting today.
How much should I have saved by 30?
According to most financial experts, how much money you are likely to need in retirement will depend on the exact age at which you will retire, how much money you plan to spend in retirement, and how long you will need your nest egg to last. But you can home in on a number by following an accepted rule of thumb.
Fidelity’s 1X recommendation
Fidelity Investments, a multinational financial management service, suggests you save as much as you earn by the age of 30. So, in other words, if you earn an annual salary of $50,000, you should have $50,000 saved up by age 30. This is the first milestone as you work toward saving 10 times your pre-retirement income by age 67.
Here are Fidelity’s suggested savings milestones:
- 2X your income by age 35
- 3X your income by age 40
- 4X your income by age 45
- 6X your income by age 50
- 7X your income by age 55
- 8X your income by age 60
- 10X your income by age 67
Fidelity’s savings milestones are based on these assumptions:
- You save 15% of your income each year starting at age 25
- You invest more than 50% on average of your savings in the stock market
- You retire at age 67
- You plan to maintain your current lifestyle in retirement
According to Fidelity, the age at which you plan to retire and the lifestyle you want to maintain in retirement are likely to be the two biggest factors that affect your financial goals.
T. Rowe Price’s 1/2X recommendation
Investment management firm T. Rowe Price also recommends you save at least 15% of your income to reach similar savings milestones. By age 30, the investment firm recommends you should have half your annual income saved.
T. Rowe Price suggests the following retirement savings benchmarks:
- 1X your income by age 35
- 2X your income by age 40
- 3X your income by age 45
- 5X your income by age 50
- 7X your income by age 55
- 9X your income by age 60
- 11X your income by age 65
According to T. Rowe Price, these benchmarks assume you will rely primarily on personal savings and Social Security benefits in retirement. If you have other retirement income such as a pension, you may lower these savings benchmarks.
If you compare the two sets of benchmarks, Fidelity recommends saving more aggressively earlier in life. This could help in the long run, as it gives your money more time to grow. T. Rowe Price’s guidelines also have you retiring two years earlier, as a 65-year-old.
|Suggested retirement savings as a multiplier of annual income|
|Age||Fidelity Investments benchmarks||T. Rowe Price benchmarks|
Both of these sets of guidelines are meant to act as goalposts. If you’re on track with either, keep prioritizing your retirement savings. If you’re behind, don’t panic. Focus on the actions you can take today to put a plan in place. The first step to take will be to set your own savings goals and calculate the exact amount of money you will need to enjoy a successful retirement.
How to set your own savings goal
Now that you have some context, you can look at your personal finances and lifestyle and set your own savings goal. First, you need to make some decisions about your ideal retirement:
- Decide on the age at which you want to retire. This should be both realistic and attainable. Keep in mind that you may not receive your full Social Security retirement benefit, depending on the age you target for your retirement. You can start collecting Social Security at age 62, but you won’t get your full benefit. For those born after 1960, the retirement age at which you would receive 100% of the benefit amount is age 67.
- Decide on the lifestyle you want to maintain in retirement. Where will you live and what is the cost of living there? How do you want to live out your post-career years? What sorts of activities will be meaningful and fulfilling to you? For some people, retirement will be about active vacationing. Others may prefer to spend their time volunteering in their communities or caring for their grandchildren.
Once your lifestyle expectations are set, it’s time to run some numbers. According to Fidelity, the average retiree will need between 55% to 80% of their current annual income to maintain the same standard of living in retirement.
So if you have a current household income of $100,000 per year, you will need roughly $55,000-$80,000 per year after you retire. If you plan to enjoy a 30-year retirement, that means you will need roughly $1.65 to $2.4 million in total.
This gives you an estimate of what you will need in retirement, but you can generate a more precise savings goals by considering the following factors in your calculation:
- Other sources of income you may have in retirement (pension, Social Security, etc.)
- Anticipated lifestyle and associated living expenses
- Health expectations and/or any preexisting conditions
- Travel plans and aspirations
- Having money set aside for unexpected expenses
- Inflation and tax bracket
It will take some time to figure all this out, but it should help you settle on a realistic savings goal. Once you’ve determined how much money you will need, it’s time to start saving.
How to start saving today for a successful retirement
1. Set a weekly or paycheck period goal
With your overall retirement goal in place, you can now set a smaller goal regarding how much and how often you will make contributions to your savings. This could be a weekly or paycheck period goal. This helps break the big goal down into doable chunks, which will make it feel more attainable.
Here’s an example of how to break down your savings goal into smaller steps:
- You’ve set a modest goal of having $500,000 saved for retirement.
- You want to retire at age 65 and you’re 30 right now, so you have 25 years to save.
- $500,000 divided by 25 years equals $20,000 you need to save each year.
- Since there are 52 weeks per year, that means you need to set aside $385 per week.
Digit, an app that helps you save money, is a tool worth considering. The app analyzes your spending and upcoming bills against your checking account balance. Then, it moves money that isn’t allocated toward bills into a savings account. It’s a convenient way to automate saving, but the service does cost $5 per month. Alternatively, you can usually set up free automatic transfers into savings with most checking accounts.
2. Open up an IRA
IRAs are perfect retirement savings accounts for two reasons: They’re tax-advantaged and they offer a variety of investment options to choose from.
Contributions to a traditional IRA are made with pre-tax dollars, but money you take out in retirement will be taxed according to your income tax bracket at the time of distribution. Contributions to a Roth IRA are made with after-tax dollars, which means distributions in retirement won’t be subject to taxes.
Some IRA providers will allow you to choose your own stocks, bonds, exchange-traded funds, mutual funds, and more. If you choose your own investments, consider your age and risk tolerance. If you’re younger, you may consider taking on more risk because you have more time on your side to make up for any losses. If you’re older, a less volatile portfolio might be ideal.
You can typically automate your IRA contributions. Most IRA providers make it easy and allow you to choose the frequency at which you would like to make contributions. Keep in mind that IRAs also have a contribution limit per federal regulation. The annual contribution limit in 2020 is $6,000 ($7,000 if you’re age 50 or older).
3. Start a 401(k)
If you max out your IRA contributions, then you may be wondering where to put your retirement savings next. A 401(k) can be a great option to continue building your retirement nest egg, as the annual limit on contributions is much higher than with an IRA. The contribution limit for 2020 is $19,500 for people under 40.
Depending on your employer’s plan, you may be able to choose between a regular 401(k) and a Roth 401(k). This means you can choose to be taxed now versus in retirement on your contributions. You may sometimes be able to pick your individual investments, but typically you pick your risk tolerance and the 401(k) provider matches you with a portfolio.
If your employer offers a 401(k) plan and matches any amount of your contribution, consider at least contributing up to the amount that is matched. This essentially doubles your savings and is free money you shouldn’t turn down.
4. Open a high-yield savings account
Once you’ve got your IRA and 401(k) contributions set, then a high-yield savings account is a great next move for storing your money. These accounts earn interest well above the national average for a traditional savings account and they’re easy to apply for online.
You’ll find most of these accounts through online banks, and there’s usually no limit to the number of savings accounts you can open. Opening more than one savings account can make it easier to track your savings if you’re saving for two different goals, such as retirement and a house down payment.
5. Evaluate your student loan debt
If you’re a millennial, there’s a good chance you have some student loan debt. This means you’re faced with deciding whether it makes more sense to start saving for retirement, pay off your debt first, or do a combination of both.
To determine which path to take, first look at the interest rate on your student loan debt:
- If the interest rate on your student loans is low, you might choose to move to the next step and focus on investing your money in the hopes that the return on your investments exceeds the interest rate on the loan. Historically, the stock market has returned around 10% a year on average.
- If your loan has an interest rate higher than 10%, tackling that debt first might be a better idea. Otherwise, the higher interest rate on your debt will cancel out any returns you see on your investments.
If you feel your interest rate is too high, consider refinancing your student loan. If your financial situation has improved since you originally took out the loan, you might qualify for better rates.
Prioritizing saving for retirement is still a no-brainer if your employer matches a portion of your contributions to a 401(k). If your employer doesn’t provide a match, you may still choose to save for retirement while simultaneously paying off debt.
Note: If you have a lot of other debt — such as credit card debt, car loans, etc. — you might consider refinancing them as well. Balance transfers are an easy way to refinance credit card debt.
6. Start investing
Once you’ve set up your IRA, 401(k), and savings accounts, it’s time to consider investing beyond those accounts. Online brokerage accounts have made it easy to start investing in the stock market.
With the top online stock brokerage accounts, you will likely have access to mutual funds and ETFs. These are professionally managed funds that allow you to easily invest in a variety of securities. Before you pick a brokerage, be sure you understand what sort of fees the fund charges. These fees exist regardless of how the fund performs, so they’re important to understand when it comes to your bottom line.
An alternative is investing with robo advisors. A robo advisor is algorithm-based and operates with minimal human supervision. Most often, you answer a few questions about how much risk you’re comfortable taking, and the company matches you with a portfolio based on your risk tolerance.
With the best robo advisors, you’re usually charged an annual fee of between .25% and .50%, and you don’t have to worry about managing your portfolio yourself. These aren’t always the only fees, though, so be sure to read all the fine print as you would with any other investment.
The path to the ideal financial future will be different from one person to the next. If you’re feeling absolutely lost, it might be worth speaking to a financial planner. They will help you construct a plan tailored to your specific situation.
But if you’re in your early 20s, you have plenty of time to reach your 30-year savings goal. If you’ve recently entered your 30s and you’re behind on your savings, do not give up. You may have to save more aggressively, but you can still reach your financial and retirement fund goals.