Saving for retirement can seem like a daunting or even impossible task – ESPECIALLY if you, like me, spent the majority of your 20s in college. Like many others, when I graduated from law school I was in my mid-twenties, saddled with an extremely high amount of student loan debt and jobless. Once I passed the bar and found a steady job, the Fed Loan bills started rolling in.
It makes me nauseous to even think about my student loan debt, so I will just say this:
My student loan payment was more than my rent. In Center City Philadelphia. By a lot.
I know that doctors, architects’ and basically anyone with a master’s degree is in the same boat. Soo, I feel ya, my dudes. I feel ya.
Essentially, I was barely making enough to pay rent, cover the loan payments and purchase top ramen, which meant that I was in no position to dedicate any of my paycheck, let alone a significant portion, for retirement.
Instead, my extra money was going into an emergency fund and to pay down debt (emergency funds are incredibly important and I would strongly suggest setting one up, because trust me, you DO NOT want to rely on credit cards if shit hits the fan). However, as I started approaching the big 3-0, I realized that I needed to start looking into an investment account (of some sort) to prepare for retirement.
1 in 5 Americans have less than $5,000 saved for retirement … roughly 15% of Americans have no retirement savings at all.
I had no idea that it was so complicated and apparently, I’m not alone. From determining a percentage of gross income to save, to selecting the best savings account, many Americans fall short. According to a recent study by Northwestern Mutual, 1 in 5 Americans have less than $5,000 saved for retirement, and it is anticipated that roughly 15% of Americans have no retirement savings at all. Even more shocking, 47% of Americans believe that they will need to work beyond the traditional retirement age of 65 out of financial necessity.
These numbers should scare you. They surely scared the hell out of me. Fortunately, it’s not too late to begin saving, but you will need to determine: 1) what is affordable given your budget and 2) the total amount you will need to retire comfortably.
Step #1 Understand Your Numbers
As a general rule of thumb, a retirement account should contain at least 80 percent of the yearly salary you earned while working. To determine the total amount necessary to retire, multiply the 80 percent by how many years you are expected to live beyond retirement. For example, someone who is expected to live 15 years post-retirement, with an annual salary of $65,000, should aim to save a total of $780,000.
Eg. $65,000 x 80% = $52,000 per year;
$52,000 x 15 = $780,000.
Once you have determined the amount of money you will likely need to retire comfortably, it is imperative to setup a plan and start saving. Financial experts recommend contributing up to 15% of your gross income to a retirement savings fund whether that be a Roth IRA or a 401(k). The idea is to contribute monthly into a retirement program and then reap the benefits of the money growing over the years.
However, for many Americans, it’s simply not feasible to set aside 15% of their gross income. Suppose you earn $65,000 per year and contribute 15% to your 401(k). 15% of $65,000 is approximately $9,750 per year, which is roughly $813 per month.
Uhm, Excuse me? If panic is setting in, take a deep breath! Although these numbers seem impossible to reach, there are programs in place and steps to take that make saving for retirement achievable.
Step #2 Starting Saving Now
The first step is to start saving now! The sooner you start contributing to your retirement account, the more money you are able to save over the span of your career. For instance, the chart below represents three different saving scenarios based on the following facts: Amy, Billy and Clark each contribute $500 per month, which equates to an annual contribution of $6,000. They invest in a 401(k) with an annual return on investment of 8%. Below, each employee begins contributing at a different age.
| Age | Years to Contribute | Annual Contribution | Annual ROI | Total invested | Ending Balance | |
| Abby | 25 | 40 | $6,000 | 8% | $240,000 | $1,678,686.24 |
| 30 | 35 | $6,000 | 8% | $210,000 | $1,116,612.89 | |
| Bobby | 35 | 30 | $6,000 | 8% | $180,000 | $734,075.20 |
| 40 | 25 | $6,000 | 8% | $150,000 | $473,726.48 | |
| Claude | 45 | 20 | $6,000 | 8% | $120,000 | $296,537.53 |
| 50 | 15 | $6,000 | 8% | $90,000 | $175,945.69 |
As you can see, even a five-year difference can make a huge impact on the amount of money that accumulates in a retirement account. The sooner you start saving the more prepared you will be for retirement.
Step #3 Don’t Be Discouraged, Small Contributions Add Up
Although financial experts recommend contributing 15% of your gross income, remember that any contribution is better than no contribution. If contributing a full 15% is unfeasible, don’t fret! Starting to invest with even a couple hundred dollars per paycheck is a huge step in the right direction – especially if you start investing now. In our example above, a monthly contribution of $500, per month starting at age 30, equated to over a million dollars by retirement.
Remember that you can always change your retirement contribution. There isn’t some archaic rule that states you must pick 15% and stick to that number until you retire – instead, pick an amount that you are comfortable with and revisit it every year. Perhaps, this year it’s $300 per month, and next year it’s $500 per month. The key is to start somewhere.
- Take Advantage of Matching
If your employer offers to match a percentage of your monthly contribution, you should contribute enough to receive that benefit. Even if you can’t afford to contribute a full 15 percent of your paycheck, any amount is better than nothing at all. For instance, if you contribute $100 per month and your employer offers a 25% match, your monthly contribution is now $125. This matching is important because it is essentially free money. * Be sure to read the fine print regarding vesting and all that jazz.
Bottom line: if you plan to stay at your firm for a few years, take advantage of matching.
- Increase contribution over time
Increasing your payroll deduction incrementally is an easy way to build up to the maximum deduction. Even starting with a 3% contribution that increases quarterly or yearly can make a huge difference in the long run due to compounding interest. This method is simple, effective and easy on the bank because a one percent increase only decreases take-home income slightly.
Step #4 Research Investment Firms
There are so many resources to plan for your future. Whether it’s a 401k, Roth IRA, Bonds, Real Estate or annuity, there are many options out there to maximize your money for retirement. Again, if you’re like me and don’t have a vast knowledge of how all this jazz works, reach out to someone who does. Many companies (Northwestern Mutual, Vanguard, Charles Schwab etc.,) are ready, willing and able to discuss your financial picture and craft a plan to fit your needs.
In conclusion, the benefits of saving for retirement early are immense. Investing even a small portion of your paycheck is better than investing nothing at all. So don’t wait – start investing now.
A version of this article was originally published in Living Safer Magazine in 2019.