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How Much 20-Somethings Should Save for Retirement
Your 20s may seem like an odd time to think of saving for retirement, but it’s actually the perfect moment to start planning for your later years. That’s because the earlier you start saving, the more time your money has to grow.
Savers who begin setting aside 10% of their earnings at 25, for example, could amass significantly more by retirement age than those who wait just five more years to start saving. You can use a retirement calculator to see how much you should start saving now to reach your retirement goal.
Building a nest egg on a starter salary and a shoestring budget can seem daunting, though. Focusing on the incremental savings, rather than the goal, can help your savings objectives feel more manageable.
How much to save for retirement
For those earning around $25,000 a year, the median income for 20 to 24 year olds in 2015, saving the recommended sum of 10% amounts to a little more than $200 a month.
It may seem like a reach, but consider this: If you start saving $100 a month at age 25 and invest it to return 7.7% a year — the average total return of the Standard & Poor’s 500 Index of U.S. stocks over the past decade — you’ll have more than $378,000 available at retirement age. And it could be tax-free.
If you wait until you’re 30 to start and save the same monthly amount at the same rate of return, you’ll wind up with less than $253,000.
Several vehicles can help you build a retirement fund. A 401(k) plan, typically offered by your employer, is often the most convenient and easily accessible of these. Contributions you make usually aren’t taxed, which helps reduce your income tax liability.
Pre-tax 401(k) accounts make up around 80% of retirement plans offered by employers, according to the American Benefits Council. Roth 401(k) accounts are another option, though these are less widely available, and money contributed to a Roth 401(k) account goes in after it’s taxed. Money withdrawn from this type of account — including earnings — is usually tax-free.
Companies that offer a 401(k) plan often match employee contributions, up to a certain percentage. This is essentially free money toward your retirement.
If your employer will match your contributions, try to take full advantage and commit a large enough percentage to get the full benefit.
Beyond a 401(k), individual retirement accounts, commonly referred to as IRAs, offer another solid option. There are two types: traditional and Roth.
Money put into a traditional account is tax-deferred, similar to funds put in a traditional 401(k) plan. That means those funds aren’t taxed until they’re taken out. But typically any earnings you make with the money are also subject to income taxes on withdrawal.
Money put into a Roth IRA has already been taxed when you earn it, so there’s no immediate tax benefit. When it’s time to withdraw the cash, however, you usually don’t pay taxes on it. And anything the money earns also can be taken out tax-free.
Contributions to both types of IRAs are currently capped at $5,500 a year for those under age 50, and $6,500 for older workers.
How much to save for emergencies
In addition to retirement, it’s also wise to save for a rainy day. Ideally, your emergency fund should be enough to cover three to six months of living expenses.
Some experts suggest setting aside even more for savings and investments: 20%. That’s roughly $415 a month on an annual income of $25,000.
That’s not always feasible, especially if a big chunk of your monthly income goes to student loan and credit card payments. Consider saving what you can, even if it’s just $10 a month.
Making a habit of saving now could serve you well down the road. And, as your income increases, the percentage you save can as well.
© Copyright 2016 NerdWallet, Inc. All Rights Reserved
4 Financial Resolutions for the New Year
Another new year is upon us, and with it comes a fresh start. Take a moment to shake off all the bad vibes from 2016 and start 2017 off right by resolving to get your finances in order. Below are a few financial resolutions to start you down the path to better money management in the New Year.
Set a Budget
Setting a budget is the first step to financial fitness. Without a budget, it’s difficult to know where you stand financially. Sure, you probably know roughly how much money you make each month, but do you really know where that money is going? Are you spending too much on your morning coffee or takeout or shopping? Could you be making greater payments on your debts or saving more toward retirement?
To get a better handle on your finances, you’ll need to create a budget. You’ll need to know your monthly income after taxes (net income) and your recurring monthly expenses, such as rent or mortgage payments, car payments, insurance, utilities, etc. Once you’ve gathered these items, you’ll add up your expenses and subtract them from your income. If you have money left over, you can allocate those funds for savings or other financial goals and toward things like shopping and entertainment.
Sticking to a budget is the tricky part for most. Budgeting apps like Mint can help greatly, and a quick Google search can provide you with printable worksheets if you prefer to go the pen-and-paper route.
Erase Your Debt
The average amount owed per household is nearly $8,400, making getting rid of debt another priority for 2017. Although $8,400 is a pretty daunting number, you can opt to set a goal for yourself that is more manageable. WalletHub suggests repaying 20% of your debt within a year. If 20% stretches you too thin, adjust it – try paying off 15% of your debt instead. Or, maybe you want to pay 20% of your debt off within six months instead of a year – that’s fine, too. The key is to set a goal that works for you and your current financial situation.
Don’t forget to look at other areas of your budget when you set goals. Are there areas in which you could reduce spending and then allocate those funds toward a credit card payment instead? Are there small lifestyle changes you could make to reduce spending? For example, using a reusable water bottle, walking to more places to save on gas or cab/Uber/Lyft fare, or reducing the number of times you eat out.
Save, Save, Save
Most of us know how unpredictable life can be, which is exactly why having a healthy savings account is so important in avoiding or lessening financial struggle in the case of emergency. Establishing an emergency fund is often advised before tackling other debts, and the ideal amount you should aim to save is three to six months’ worth of living expenses.
If you already have a good chunk in your emergency fund, start working toward your other savings goals. Maybe you’d like to save more for retirement, or maybe you’d like to take that trip to Europe you’ve been planning in your head for years. Look for areas in your budget that you can adjust to help you save toward those goals. Another good tip? Start saving all your $1’s and $5’s – it’ll add up faster than you think.
Plan for the Future
Even if you’re young and just starting out in your adult life and think you’ll start saving for retirement later, don’t – retirement is a huge expense! The average American spends 20 years in retirement, and experts estimate you will need to save 70% to 90% of your pre-retirement income to maintain the same standard of living after you stop working.
Take advantage of your employer’s retirement plan and contribute as much as you can. If you have a 401(k) plan, your employer will match your contributions, usually up to a certain amount based on how long you’ve worked for them. If you don’t have retirement benefits through your workplace, you still have options, such as a Roth or Traditional IRA, or if you don’t know what your best option for retirement is, we can help.
7 Money-Saving Tips for Teens
Most teenagers probably won’t leap at the prospect of learning about personal finance on their own. That’s why it’s important to take the time to teach them smart money management. To get the conversation started, here are seven topics worth discussing to help your teen avoid costly financial missteps in the future.
Encourage your teen to get a job
Preaching about the value of a hard-earned dollar isn’t quite as effective as encouraging your child to get a job. By working for their money, teenagers are likely to begin thinking critically about how they spend it, which is a good habit to pick up at an early age. If your child is too young for a job, you could provide a weekly allowance for helping around the house.
Help your teen set a budget
Once your teen starts earning money, explain how to set a budget. Consider explaining the difference between essential and nonessential expenses, providing examples from your own life.
Set financial goals together
Since creating a budget isn’t the most exciting activity, introducing the idea of saving up for a fun purchase might reinvigorate your teen. Putting away money every month requires discipline and is a great skill to practice at an early age by regularly stashing away some cash for a new smartphone, for example. Crunch the numbers with your child to determine how much needs to be saved each month to hit the savings goal by a certain date.
Help your teen sign up for a checking and savings account
So money doesn’t have to be stashed under their mattress, sign your teenager up for a checking and savings account. Although you’ll need to co-own the account if your child is under 18, your teen can have an active role in managing it. Just know that you’ll have to foot the bill if any fees, such as overdrafts, are incurred.
Encourage responsible credit card use
Although your child won’t be able to get a credit card before turning 21, anyone can be set up as an authorized user on your plastic at any age. Make sure to implement rules regarding when your teen can use the card, and make it abundantly clear that your credit score will take a hit if your card is maxed out.
Take your teen shopping
It can be tempting to overspend on name-brand products. To help your teen fight those initial instincts, shop together and explore the wonders of coupons, sales and store brand items. This should underscore the notion that popular products don’t always have to be the go-to option, which can save your child a lot of money over the years.
Teach your teen about compound interest
When it comes to saving money, compound interest is a person’s best friend. Teaching your child about the many benefits of compound interest should encourage contribution to a 401(k) plan in a future full-time job.
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