These days, turning 30 doesn’t sound quite as grown up as it once did.
And that has a lot to do with the fact that 20-somethings are finding it hard to launch into financial adulthood.
According to a 2014 Gallup poll, about a third of adults under the age of 35 still live with their parents, in part because they are unemployed or underemployed.
Furthermore, a well-known Georgetown University study that looked at three decades of census data discovered that, in 2012, young workers didn’t earn the country’s median wage—often considered a benchmark for financial independence—until age 30, up from age 26 in 1980.
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The domino effect of all this is that not only do such milestones as starting a family and buying a home get put on the back burner, but people often don't start saving for retirement until their 30s—if that.
And that’s unfortunate, because the earlier you start that nest egg, the less you’ll need to deprive yourself in your later years when you have to play catch-up. Plus, the longer you put off saving, the less likely you’ll be able to achieve the lifestyle you truly desire in retirement.
Take it from those who would know: In a 2015 HSBC survey, 38% of the world’s retirees said that those who put off planning for retirement until after age 30 have waited too long.
Moreover, 65% of those polled who didn’t prepare adequately enough for a comfortable retirement said that they didn’t realize it until after they were fully retired.
The good news? If you’re in the 30-and-under camp, you can benefit from their twenty-twenty hindsight.
“For someone in their 30s, I’d say, just start the habit of saving,” says Skip Fleming, a CFP® with Lodestar Financial Planning in Colorado Springs, Colo. “At some point later on in life, you’re going to look back and wished that you had [saved more].”
Letting the Nest Egg Numbers Speak for Themselves
Still not ready to ramp up for retirement? Let us show you why it’s important to kick start your savings strategy, pronto, with three hypothetical scenarios that illustrate the power of compound growth. (These assume a hypothetical 7% annual return.)
Scenario 1: Caleb, 22, works as an assistant retail manager earning $33,000 a year. His salary doesn’t leave a lot of wiggle room, but he cuts out happy hours and eats out just once a week, so he can squeeze $100 out of his budget to put into a Roth IRA, after taxes.
By the time he reaches 67, he’ll have accumulated almost $358,000—and this is assuming that he doesn’t increase his contributions later in life.
But if Caleb decided to wait until age 30, after his car loan is paid off and he’d splurged on a few Mardi Gras trips, that same $100 a month would earn him just $201,000 toward retirement—a difference of $157,000.
Waiting eight years shrunk his nest egg by nearly 44%.
Scenario 2: Kayla, 24, makes $59,000 as an entry-level accountant. Fortunately, she has no student loans and drives a six-year-old car, long paid off. This lets her funnel $800 into her 401(k) every month.
By the time she turns 42, her retirement fund has grown to a healthy $341,000—but her lifestyle is changing dramatically.
She’s now expecting twins. With higher costs on the horizon, she stops contributing to her retirement fund altogether, and puts the extra $800 a month toward child care. Instead of contributing more to her 401(k), she puts off retirement until 70, leaving her $341,000 untouched.
Since Emily started saving 13 years earlier, she will accrue a more impressive retirement portfolio as a public sector employee compared with her higher-paid counterpart in the private sector.
When she retires, it has grown to nearly $2.3 million—despite not adding to her fund for 28 years.
By contrast, Luther, 42, is a sales manager with a $110,000 salary—but he’s put off saving for retirement until now. He’s been more focused on paying off his mortgage, and saving for his kids’ college.
He starts contributing $800 every month until he retires at 70. What’s the reward for his 28 faithful years of saving? He’ll have just $809,000 waiting for him.
That’s right—Kayla’s nest egg ends up being more than Luther’s, simply because she started earlier.
Scenario 3: Emily, 25, a recent law school graduate, starts a job as an assistant district attorney at $68,000 a year.
Longevity runs in her family, so she wants to begin saving for retirement right away, figuring she’ll need at least $2 million to live on after she stops working at age 69.
So she begins plowing $625 every month into a 401(k). By the time she reaches retirement, her nest egg has just surpassed $2 million.
Enter Samantha, a 38-year-old attorney who works for a private firm and earns $200,000. Having paid her dues, she now foresees a future studded with fat salary increases, so she starts saving now at $1,250 a month—double Emily’s contribution.
But by age 69, she’ll have just $1.6 million in her nest egg.
Since Emily started saving 13 years earlier, she will accrue a more impressive retirement portfolio as a public sector employee compared with her higher-paid counterpart in the private sector. Emily will also contribute less of her own money toward retirement—$330,000 over her lifetime, versus Samantha’s $465,000.
5 Ways to Ramp Up Retirement Savings Post-30
These scenarios show just how important it is to start saving in your 20s. But let’s say you’ve hit the big 3-0, with a paltry nest egg to show for it. Now what?
The good news is that, with more than three decades to go until retirement, you’ve got plenty of time to play catch-up.
“What comes up a lot with my younger clients is them saying, ‘Retirement seems so far off.’ It’s hard to imagine ourselves as old people, so it’s not a very motivating goal,” says Michael Goldman, a CFP® and founder of Goldman Financial Planning in Falmouth, Maine. “So I’m thrilled if I can get clients saving for retirement in their 30s, instead of their 50s.”
But even if you’re foggy on the details of your retired life, you probably have an idea of how comfortable you’re hoping to be—for instance, that “eating out” will mean a filet mignon, not a 99-cent value menu.
With that in mind, if you’re ready to go beyond the baby steps and ramp up your retirement savings, here are some tips from CFP®s on how to help make it happen.
1. Crunch the numbers—ASAP. What our hypothetical case studies show is that seeing real-world figures can help initiate a light bulb moment.
Yes, calculating how much you’ll need in retirement requires taking a psychological plunge—especially because the figure is likely to be in the millions, particularly if you follow the rule of thumb that suggests you replace 85% of your current income in retirement.
But seeing a daunting figure now is better than being caught off-guard later: 41% of U.S. retirees in the HSBC survey who didn’t prepare enough for retirement admitted to never knowing how much they actually needed to save.
“I tell people to use every retirement calculator they can get their hands on,” says Michele Clark, a CFP® with Clark Hourly Financial Planning & Investment Management in Chesterfield, Mo.
"The possibility of a higher return is the fertilizer you spread on later. Don’t worry about the investing. Worry about your savings.”
2. Cement your commitment to a savings plan. By your 30s, consider aiming to save about 15% of your salary, suggests Fleming, by keeping retirement as a regular line item in your budget—and not an afterthought to your other bills.
Indeed, a high cost of living and day-to-day expenses are key reasons why Americans can’t save enough for retirement, according to the Employee Benefit Research Institute. This makes it all the more important to “put ‘you’ at the top of your list,” says Fleming, even if it means aggressively slashing some of your other costs.
Of course, 15% can seem like a big feat if you’ve been in the 1% savings club for a while, so try to ease into it by starting smaller, suggests Goldman.
You could start by meeting the contribution requirement for any 401(k) match your company may offer, and then commit a percentage of your next raise to retirement. “I tell people to make the commitment even before they get the raise," Goldman adds. "Put it in writing, or share your plans with your family, so you’ll actually do it.”
3. Look Into a Roth IRA. One obstacle to saving for retirement that Goldman sees is actually more psychological than financial: Many young people don’t like the idea of not having access to their money (at least, not without penalties) for several decades.
For those folks, Goldman suggests opening a Roth IRA for the benefit it offers that the Traditional IRA and 401(k) don’t: The ability to withdraw your principal contributions without penalty, even if you dip into it before age 59½.
Of course, you don’t want to get into the habit of dipping into a retirement account for any reason other than retirement. But this is a good middle ground for those struggling with a “What if?!” mind-set.
“[The Roth] takes away some of the hesitancy young people have about tying their money up in retirement accounts—those who almost feel as though they’ve ‘lost’ their money because they’re 30 and can’t touch it till they’re 59½,” Goldman adds.
4. Consider multiple accounts. If you really want to go full throttle with your saving, then one account likely won’t be enough to stash away all that you want.
After all, retirement accounts have contribution limits: In 2015, for those under 50, it's $18,000 for a 401(k), and $5,500 for a Traditional IRA or Roth IRA, combined.
“If you find that maxing out the 401(k) won’t get you [to your goal], open an IRA, and then a taxable brokerage account,” Clark says. “Higher income people often have to do that anyway because they can’t save enough with just a 401(k) or IRA.”
5. Don’t expect the markets to do all the work. Oftentimes, younger investors may think they can avoid having to boost small contributions by taking on greater risk in their investment portfolios.
But as the fine print often tells us, past performance is no indication of future performance—and your risk may not always be rewarded.
“In general, I like to get people to focus on how much more they can save—not how much more of a return they can get,” Goldman says. “The possibility of a higher return is the fertilizer you spread on later. Don’t worry about the investing. Worry about your savings.”