Retirement can be such an abstract concept for twenty-somethings, isn’t it? I remember filling out the onboarding paperwork for my first “big girl job” out of college and realizing that If I wanted to retire, then it was time to take the necessary steps to get there.
Growing up, we have this image of retirees as elderly people living somewhere like Florida. They hang out with their grandchildren, play Bridge, and enjoy a stress-free existence. That image makes the concept of retiring seem so far in the future that sometimes we forget to save for it now.
The sooner you start saving for your retirement, the more time you give your money to grow through compound interest. The median retirement balance for someone in their 20s is $24,205, according to anonymized data from people who use the Personal Capital Dashboard*. The way to grow a retirement account is to strategically invest money.
The average retirement age is 62, but that doesn’t mean you have to wait until you’re in your sixties to retire. You can retire as young as you want as long as you have enough money to support yourself throughout your life expectancy.
I’m 27 years old and am on track to have $30 million saved by the time I hit retirement age. A lot of people ask me how I did it because it seems impossible. But it’s not. That’s what I’m sharing my top tips to get you on track to retire comfortably.
1. Calculate how much money you’ll need to retire.
First things first: You need to know how much money you’ll need to live in retirement. Before you can create a plan, you have to have a clear idea of your end goal.
This is not a one-size-fits-all number. Everyone’s situation is different and your goal number will depend on your lifestyle, location, and inflation. Some of those factors are within your control and some are not.
Want to see if you’re on the right track? Check out Personal Capital’s free Retirement Savings Calculator.
2. Create a plan.
Now that you have a dollar amount you’ll need to retire, you can develop a strategy to meet that goal. Factor in any current savings accounts to get your current balance. You’ll also want to look at your budget and see the percentage you’re currently saving. Do you have a 401(k) through your employer? If so, take note of how much you’re contributing.
You can see if your savings are on track with the Retirement Planner, Personal Capital’s free tool that allows you to run different scenarios (like what would happen to your savings in a recession), anticipate expenses, and get a spending plan.
3. Trim your budget.
A big reason why people don’t save is because they don’t think that they make enough. However, it’s wise to not wait to save until you hit a certain income. If you use the 50-30-20 budget, you should aim to set aside 20% of your earnings. That savings can go toward emergency savings (aim to have three to six months of living expenses tucked away), brokerage accounts, and retirement accounts.
The other 80 percent of your earnings can go toward your needs and wants. So, 50 percent of your check will go toward expenses like rent, bills, and food. The other 30 percent goes toward spending and non essentials. Look to see where you can add money to your savings. Maybe that means cutting down on take out or canceling unused subscription services.
What might seem like only a little bit of money adds up over years of savings.
4. Open retirement accounts.
Whether you’ve begun to save for your retirement or not, it’s important to familiarize yourself with the different accounts available to you.
A 401k is a benefit offered through an employer. The contributions are made with pre-tax dollars and come directly out of your paycheck. The pre-tax contributions mean your taxable income is reduced and allows your contributions to grow tax-deferred until you withdraw your money for retirement.
What sets a 401k apart from other accounts is the potential for employer matching. If your company offers this, then it will contribute money into your 401k. The number is usually a certain percentage and varies from company to company. Make sure to take advantage of this incentive to maximize your savings.
Another employee sponsored option is a Roth 401k. However, contributions to this account are made with after-tax dollars.
Individual retirement accounts or IRAs are retirement accounts that you open on your own. In other words, there isn’t any employer matching and they’re not offered through employers. You can contribute pre-tax dollars up to $6,000 or $7,000 (for 2022) if you are age 50 or older.
You can contribute post-tax dollars to a Roth IRA even if you already contribute to a 401k plan. If you contribute to both a traditional and Roth IRA, the yearly contribution limit is the same as a traditional IRA and applies collectively to both.
Other retirement plans include SEP IRA, SIMPLE IRA, Self-Directed IRA, 457, or 403(b).
5. Start investing what you can.
Remember that 20% I mentioned earlier? That’s the goal. If that’s not feasible for your current budget, begin saving what you can. As you continue to trim your budget and gradually make more money, you can save more. Also, consider picking up a side hustle. That income on the side can go straight to your retirement savings and help you meet your goals faster.
Aim to max out your retirement accounts’ contribution limits and stay motivated by reminding yourself that the money is going toward your future.
You can use online financial tools to get a better handle on your money. My favorite tool is Personal Capital. I check it daily for tracking my net worth and my progress towards goals like retirement, debt payoff, and (yes!) saving that first $100k.
* Account balances as of 3/20/2022. Personal Capital does not independently verify the accuracy or ownership of the assets listed on an individual’s dashboard.
Personal Capital compensates Tori Dunlap of Her First $100k (“Author”) for providing the content contained in this article. Compensation not to exceed $500. Author is not a client of Personal Capital Advisors Corporation. Additionally, in a separate referral arrangement between Author and Personal Capital Corporation (“PCC”), Author is paid $70 and $150 for each person who uses Author’s webpage (www.HerFirst100k.com) to register with Personal Capital and links at least $100,000 in investable assets to Personal Capital’s Free Financial Dashboard. As a result of these arrangements, Author may financially benefit from referring potential clients to Personal Capital and/or be incentivized to present blog content that is favorable to PCC. No fees or other amounts will be charged to investors by Author or Personal Capital as a result of the Referral Arrangement. Investors that are referred to PCC and subsequently subscribe for investment advisory services provided by PCC’s affiliated adviser, Personal Capital Advisors Corporation (“PCAC”) will not pay increased management fees or other similar compensation to Author, PCC or PCAC as a result of this arrangement. The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.