How and When to Prioritize Savings for Retirement

The Millennial generation – those born between 1981 and 1991 – is the largest generation and make up the largest percentage of the workforce. According to a research done by the National Security of Retirement Security, Two-thirds (66.2%) of working Millennials have nothing saved for retirement. Between student loans, high rent prices, and paying down other debt, it’s no surprise that millennials are finding it increasingly difficult to save for retirement. It seems as if saving for retirement can be on the bottom of priority lists.

Set a Goal For Retirement Savings

Take some time to sit down with your spouse, a friend, family member, or a financial advisor to think about what you want to do in retirement and how you’re going to get there. Are you living in a waterfront condo on the beach? Traveling the world? Or living simple with your family and grandchildren?

If you want to turn your dreams into reality, you’ll need to set some goals and expectations to crunch the numbers and realize what it takes. According to Fidelity, you should be saving at least 15% of your pre-tax salary for retirement. For many people, however, saving for retirement isn’t as simple as setting aside 15% of their salary.

To retire comfortably by following the 15% rule, you’d need to get started in your early 20s. This rule also assumes you can save 15% of your income comfortably after all bills and living expenses. Using the 15% rule shouldn’t necessarily be your only stream of income for your retirement. You’ll likely rely on your retirement income from other streams like investments and Social Security in addition to what you’ve saved using the 15% rule.

If you can’t save 15% of your income that shouldn’t discourage you from saving. Investing ANY amount of money today can make a significant difference.

Start Saving Early

It’s never too early or too late to start saving for retirement. If you’re just starting out, you should focus on saving as much as you can. Compounding returns are the reason why we can benefit from starting as soon as possible with minimal effort. Compound returns can be defined as interest calculated on the initial principal and also on the accumulated interest of previous periods. Think of it as the cycle of earning “interest on interest” which can cause your future wealth to rapidly snowball. When it comes to saving and investing, compounding is definitely a good thing. Here’s how it works:

If you invest $5,000 every year starting at age 18, you could have more than $1 million at retirement. That’s almost double of someone who started at age 28 would have, assuming an annual return of 7% and no money lost.

Let’s see how compound interest works with a hypothetical example. Below, Brianna, Ethan and Jennifer experience the same 7% annual investment return on their retirement funds. The only difference is when and how often they save:

Brianna invests $5,000 per year beginning at age 18. At age 28, she stopped saving but continues to keep her account open and let it grow. She invests for 10 years and saves a total $50,000.

Jennifer invests the same amount, saving $5,000 a year, but begins where Brianna left off. She begins investing at age 28 and continues investing until she retires at age 58. Jennifer invested for 30 years and a total of $150,000.

Ethan is our most diligent saver. He invests $5,000 per year beginning at age 18 and continues investing until retirement at age 58. He has invested for 40 years and a total of $200,000.

Brianna would have $680,000 saved at retirement.

Jennifer would have $543,000 saved at retirement.

And Ethan would have $1,142,000 at retirement.

This is one example why investing can be more valuable than simply saving as you work towards building wealth. Getting started early can make a difference — the higher your account’s balance and the longer your money’s invested, the more opportunity to compound.

Start a 401k

With a new job comes plenty of paperwork, and if you’re lucky, one of those documents will be about starting a 401(k). A 401k plan is a retirement savings account set up by your employer. You contribute a certain amount of money each paycheck and use it to invest through your 401k. You have the option of investing in different stocks, bonds and mutual funds. Ideally, your employer will offer an incentive to set up a 401k plan by matching up to 50% of your monthly contributions. The money you earn from your 401k investments isn’t taxed until you withdraw it when you’re ready to retire. Ideally, when you retire you’ll have a big lump sum of that that’s grown for years!

When you open a 401k, you’ll have to choose how much you can contribute and choose what kind of funds you want to invest in. Your employer might point you to work with a financial advisor to go over your options. If your company offers to match your contributions to your plan - take it! It’s basically like free money.

While you have the right to access your 401(k) contributions and their earnings at any time, if you make a withdrawal before age 59-1/2, you are likely to face some steep penalties. If you’re leaving a job, don’t forget to roll over your 401k contributions to the next account.

Set up an IRA account

An individual retirement account (IRA) is a type of tax-deferred or tax-free retirement account that individuals can open at most financial institutions. You can open an IRA at a bank, robo-advisor or a broker.

There are three main types of IRAs:

Traditional: An IRA in which investments grow tax-deferred and contributions can be tax-deductible. Unlike a Roth IRA, you don’t have to make less than a certain amount to contribute to a traditional IRA—because they don’t have any annual income limits. But you’re required to begin withdrawing once you turn 72, and even though contributions to a traditional IRA are tax deductible, you’ll have to pay taxes on the money you take from it in retirement.

Roth: An IRA in which money grows tax-free; withdrawals in retirement are also tax-free. Currently, you can contribute $6,000 a year to your Roth IRA—or $7,000 if you’re 50 or older. Best of all, since you pay taxes on the money when you contribute, you’ll be able to use your savings in retirement tax-free. That means you won’t have to pay a penny in income taxes to use it for your retirement. To be eligible to fully contribute to a Roth IRA, you must have an earned income of less than $190,000 for married couples or $124,000 for a single person filing.

Rollover: An IRA created by transferring money from a 401(k) or other retirement account. If you’re leaving a job, you usually have three choices and they all have their own benefits. You can leave it, roll it over, or cash out. A benefit of a rollover IRA is that it avoids having to pay current taxes or early withdrawal penalties on retirement assets when done correctly.

Diversify your risk - alternatives

There are so many different assets you can invest in nowadays, and it can be overwhelming to think through what is the right blend of investments for you and your future goals. No matter what you want to invest in, everyone should consider diversifying their risks to avoid too much concentration in one area of their portfolio. This technique will help you reduce risk by allocation investment across various financial instruments, industries, and other categories. The idea aims to maximize your returns by investing in areas that will react differently to the same event. Investopia considers this one of the most important components of reaching long-range financial goals while minimizing your risk.

Thanks to the JOBS act which has brought crowdfunding to the masses, retail investors have an opportunity to invest towards asset classes and other private investments that may have been reserved for a smaller more private audience. This includes real estate, private equity, hedge funds and more. We believe that diversification is not just in the underlying asset class, but also through public markets and alternatives.

Automate your savings

Everyone should consider some liquid cash in a savings account, high-yield savings or a Certificate or Deposit (CD). You can often withdraw your money at any time without penalties or significant tax consequences. While interest rates are typically low, these accounts are insured by the federal government never to lose value, so the savings will be there when you need it. A classic saying in personal finance is “pay yourself first.” Before your paycheck hits your bank account, you should set up a plan to put some of that money into a retirement savings plan. You can’t spend the money if it’s already in your savings.

Saving & investing apps

There are many web and mobile apps that help you automate your savings and investments. You can do fine without them, but if you need extra help with the automation and recurring transfers, they are a great resource. If you’ve ever wanted to make savings happen without having to think about it, you might want to try one (or more) of these apps.

Automate what you can! Whether it's your investments, bills, or your savings - consider automatically deducting them from your account. If you never used or seen the money in the first place, you’ll be less likely to spend it! DRIP investing can be a smart person’s road to riches.

One of the worst things you can do is do nothing

Each decade of your life will come with new challenges and new expenses. It’s never too early or too late to start saving for the retirement of your dreams. If you’re just starting out, focus on saving as much as you can now and find the right path for you. With steady contributions and recurring investments, it’s possible to grow your nest egg of financial security.

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