Hello 30: Time to Start Saving for Retirement

I began saving for retirement as soon as I started my post-college career at age 23, but I know that isn’t everyone’s story. I have friends in their thirties who have put off saving for retirement because they’re trying to pay off student loans or other debts. And even if you’ve freed yourself from most of your debts, switching gears to saving can be overwhelming. 

Find Your Number

Before you open a retirement savings account anywhere, you need to decide how much you can save without creating stress on your budget. The general advice is to invest 10% to 12% of your earnings as soon as you start working. However, if you’re getting a late start, that number may need to be 15% or more. 

A retirement savings calculator can help you estimate how much you’ll need to save, depending on when you plan to stop working and your plans for retirement. These calculators provide an estimate of your retirement nest egg based on your annual salary, the percentage you plan to contribute, projected investment returns, potential raises and more. If your employer offers a retirement plan, the plan provider may offer a calculator. Or you can go to www.bankrate.com and select “Retirement calculator” under the site’s “Retirement” navigation tab. 

If saving 15% of your earnings isn’t workable, scale it down to a percentage you’re more comfortable with. As your salary increases, you can ramp up contributions. Another option is to sign up for auto-escalation, which is offered by many 401(k) plans. Typically, the plan will increase your contribution automatically by one percentage point at a specific interval—annually, for example—until you reach 15% (or some other amount). If you are still paying down student loans and other debt, at least contribute enough to your retirement plan to get any employer match.

How to Invest

With a traditional 401(k), your contributions are made on a pretax basis, which lowers your taxable income and reduces your tax bill. For 2022, you can contribute a maximum of $20,500 to a 401(k) or other employer-provided plan. If your employer offers a matching contribution, the sooner you sign up for the plan the better. Otherwise, you’re leaving free money on the table. 

If you don’t have access to a retirement plan through work, you can set up a traditional or Roth IRA at a financial institution. With a traditional IRA, your contributions are deductible if you don’t have access to a retirement savings plan at work, no matter how much you earn. Even if you have access to a plan at work, a portion or all of your contribution may still be deductible if your 2022 modified adjusted gross income is less than $78,000 if you’re single or $129,000 for married couples who file jointly. Contributions to a Roth account are after-tax, but all withdrawals will be tax-free as long as you’re 59½ and have owned the Roth for at least five years (you can also withdraw contributions tax-free at any time). For 2022, you can contribute a maximum of $6,000 a year to a traditional IRA, a Roth or a combination of the two. Whether you go the 401(k) route or invest in an IRA, you should select a diversified portfolio of low-cost investments. For millennials signing up for their employer-sponsored plan, the path of least resistance is usually a target-date fund. Simply choose a fund that’s closest to the year you plan to retire. Once you sign up, professionals decide which funds to buy and how much to invest in stocks and bonds. As you get closer to retirement, the fund ratchets down your exposure to risk. Your only job is to supply the money. 

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