Saving for Retirement: Preparing in your 20's, 30's, and 40's

For some, saving for retirement can be an intimidating subject. Then, add in talk of investing, and it can be utterly overwhelming to the point where some don't start planning at all.  Many questions usually arise, such as where you should start, how much you should save, and what types of investments to make. 

Saving For Retirement: General Facts and Figures

The standard goal for retirement is to save enough to be able to at least match your current lifestyle. This article from The Motley Fool explains why anticipating that you will need 80% of your pre-retirement income is a good rule of thumb to use. For example, if you make $100,000 per year, you will need $80,000 per year of retirement.
At a salary of $50,000 per year, savings would be $40,000. This sounds like a large goal, however, it does not all fall on these savings. Most investment experts agree that individuals should count on their savings making up about 45% of your retirement financing. The rest of this is made up of several components.
It is generally advised to save 15% of your annual income for retirement, based on saving from age 25 to age 67 with steady employment. If you start saving later than 25, this percentage could increase. Other factors to consider when determining how much you should save, and that are included in the 80%, are:
  • Pension – Will you receive a pension to supplement your retirement income?
  • Social Security – It is important to note, at this time it is unclear what percentage of social security funds will be received by retirees beyond the year 2037, after which trust fund reserves will be empty. Retirees could receive a lower percentage than they do today. It is currently projected that beyond 2037, continuing taxes will be able to make up 76% of scheduled benefits unless other reforms are made.
  • Length of Employment – How long do you plan to work?  The estimates listed here are based on a retirement age of 67, which is when individuals are eligible for full social security benefits. However, many people retire earlier than this. The Center for Retirement Research lists an average age of retirement as 64 for men and 62 for women.
This article will give you an overview of the different types of investment accounts and terms, as well as provide some helpful tips on making the right retirement investing moves when saving for retirement in your 20s, 30s, and 40s – even if you are just getting started!


Retirement Investing 101: Gaining a Basic Understanding

Let’s start with the basics. What is investing, and how is it different from other types of savings?  Investing is allocating your money to a financial asset, such as a stock, bond, or security, with the expectation of receiving profits in return. Investing is different from other savings options because you have the potential to earn much higher returns on your money than you do on basic savings accounts or certificates of deposit. There is, however, risk involved in investing.

More Risk = More Reward!

When handled properly, the risks associated with these accounts can be mitigated and prove beneficial. Some types of investment accounts, such as IRAs or 401ks, geared specifically for retirement, also offer tax breaks. You have to determine which might work best for you or consult with a professional who can advise you.

Compounding Interest

Compound interest plays a large part in accumulating funds in an investment account. Compound interest is when you earn interest not only on the principle of your investment but also on previously accumulated interest. This adds up over the years in investment accounts. The more interest you earn, the higher the amount of money that you earn interest on!  Here is an example of compound interest for an account opened with a smaller investment amount of $500.
  • Initial investment: $500
  • Monthly contribution: $5
  • Length of time that you save: 25 years
  • Estimated interest rate: 5%
  • Compounded annually, in 25 years you would have $4,556.80.
  • Compounded monthly, in 25 years you would have $4,718.19.
To look at this in another way, your monthly $5 contributions for 25 years come to a total of $1,500. Adding your initial investment amount of $500 to this figure equates to a total of $2,000 that you have placed into this investment. Due to compounding interest, your investment has more than doubled. This example also shows the importance of investing even if you can only contribute small amounts.
Use this calculator to create your own scenarios of compounding interest.

 Learning the Lingo 

There is a lot of terminology associated with the investment accounts typically used to save for retirement. Here's just a few common ones defined:
  • Stocks – Owners of stock, which is divided into shares, share ownership in a corporation. There are two types of stocks. These are common stocks and preferred stocks, both of which have their own rules and features.
  • Bonds – A bond is like a loan, where you are lending money to the government or a company. As the lender, you will eventually receive your money plus interest back on the maturity date.
  • Mutual Funds – Mutual funds are a pool of money provided by investors. This is called a pooled portfolio. The money is then invested by a professional portfolio manager.
There are three commonly used retirement accounts. These are traditional IRAs, Roth IRAs, and 401ks. The breakdown below lists the pros and cons of each of these three accounts.

Individual Retirement Accounts

If you have an earned income, you can open an individual retirement account, commonly referred to as an IRA. The IRS has set rules on what qualifies as earned income in order to contribute to an IRA. The general definition is that you can get earned income if you work for someone who pays you or if you own or run a business or farm.
An IRA typically contains an assortment of stocks, bonds, certificates of deposit and other assets. You can invest in safer or riskier IRAs. The amount of risk that is typically advised is dependent upon your age. Younger people often will be enrolled in a riskier plan. Riskier plans can result in higher returns, and younger individuals have more time to make up for any losses resulting from the risk. As you get older, and your portfolio has less time to recover, it is typically advised to switch to safer investing options.
As of 2020, the maximum amount you can contribute annually to an IRA is $6,000. If you are older than 50, you can contribute an additional $7,000. This amount is cumulative between both types of IRAs, meaning if you have both types of IRAs, you can contribute $6,000 between the two, such as $3,000 to one and $3,000 to the other. You cannot contribute $6,000 to each.


Traditional IRA 

• There are not any income limits.
• Contributions are tax deductible for the year they are made.
• You will pay taxes on withdrawals made during retirement.
• At age 70, you are required to take minimum distributions, whether you need the funds or not.
• If you must withdraw funds before age 59 ½, you will be subject to paying income taxes plus a 10% penalty.
• You can no longer contribute to this plan after 72 years of age.

Roth IRA

• Taxes were paid when contributions were made, so you don’t pay taxes when making withdrawals at retirement.
• There is no required minimum distribution.
• You can withdraw your contributions free of tax and penalties before age 59.
• You may contribute to this account for as long as you are working.
• There are income limits. Once you exceed the income limits, contributions will cease.
• They are not tax deductible when you make contributions.
• If you withdraw from your earnings rather than your contributions, you will be subject to paying income taxes plus a 10% penalty.
There are certain exceptions to the penalties for early withdrawals from both types of IRAs for various reasons, such as financial hardship and high medical costs.
Learn more about the differences between Traditional IRAs and Roth IRAs in one of our latest articles!


If you are employed, you can have a 401k plan. There is also a special option if you are self-employed. A 401k plan is an investment account where your funds are contributed to a variety of investment options which include stocks, bonds, and money markets.
• There are high contribution amounts for this plan, up to $19,500 for 2020.
• Contributions are tax deductible.
• Your employer might limit your investment options.
• Income tax is paid at the time of withdrawals.

saving-for-retirement-in-your-20sPreparing for Retirement in Your 20s

By the time you reach your 20s, saving for retirement is likely a phrase you have already heard many times from your parents, teachers, or employers. It can be very easy to put off thinking about retirement at this age since it is typically quite away down the road. Out of sight, out of mind. However, it is important to start saving for retirement at an early age.
Benefits of early retirement planning include:
  • Increased earnings potential through longer savings and maximum compound interest
  • More time for your assets to recover from volatile markets
  • Possibility of a better retirement lifestyle
  • Ability to retire earlier if desired
By the time you are 30, it is recommended to have one years’ worth of salary in savings. This is quite a lot of money to save in your 20s, which can be a very versatile decade in life. Many start this decade while in a college or vocational school, subsequently land their first career-related job, and could possibly even add in marriage and children before the end of it.  These things also make the 20s a very expensive decade. You might be working on an entry-level salary, while still having college expenses to pay off. Keeping all of this in mind, how do you prepare for retirement in your 20s?
Most financial advisors will begin financial calculations at age 25. This gives you time to finish career training and land a job. Once you have obtained this job, you should start doing the following things.

Take a Financial Course

When landing your first career-related job upon completion of college or vocational school, this is likely the first time that you are encountering the types of benefits that come with these jobs. This is the perfect time to take a financial or retirement planning course. Check with your employer, local credit union or financial institution to see if they offer these and become familiar with these offerings.

Take Advantage of Employer Programs

In addition to providing contributions to your retirement account, some employers might offer matching contributions to your 401k plan or an IRA. The way that this typically works is that if you put a certain percentage of your pay into your retirement savings plan, your employer will put in the same amount, up to a cap determined by the employer. Some employers also offer profit-sharing, where a certain percentage of profits are added to your 401k. This is the best place to start your retirement plan savings and take advantage of the additional funds provided.
Your employer deposits 5% into your 401k. They then match up to 3% more if you contribute the same amount. Therefore, if you deposit 3% of your pay, you could have 11% of your funds going into your retirement account. Then there are only 4% more savings needed to reach your 15% goal.
Some individuals are hesitant to use these accounts at first because they are unsure of what happens to their funds if they leave their employer. Don’t fear, these funds belong to you. You will have the option to cash out or rollover your account. When saving for retirement, the best choice is to roll over your funds. This will allow your earnings to continue to grow. If you cash the funds out, you will be subject to taxes and possibly an additional 10% penalty.

Find a Reputable Financial Advisor

Even if you are well-versed in finance, retirement planning and investments can get tricky. It is important to build a relationship with a reputable financial advisor. It can be mistaken that you only need a financial advisor if you have a lot of wealth or assets already built up, but this is not true. A reputable financial advisor can help ensure you are on track for retirement. 
Your employer might automatically utilize a company that can assist you. You can also always consult with another financial advisor of your choice. Whomever you decide to speak with, make sure to verify the authenticity of any broker or firm that you decide to use.
121FCU provides complimentary retirement and financial planning services for members!

Open an Account

The most important step in starting the process of preparing for retirement is to open an account. This will make you more likely to begin using it. As previously stated, start with options sponsored by your employer, particularly a 401k.
Utilize the resources of the company you are using to maintain your account. Technology today provides real-time updates on your finances, along with multiple tools for managing, calculating and forecasting them. As you are more interactive with these platforms, you will become more vested in your savings, and take saving more seriously.
If you have a high-deductible health plan, you might be eligible for a health savings account. These HSA accounts offer many benefits, including remaining funds reverting towards retirement later in life.

Set Your Retirement Goals

How your retirement lifestyle will be depends on the choices you make in this early stage. Do you simply want to live the same as you do throughout your working life, or would you like additional perks such as traveling?  If you wish to travel when you retire, you might need to save beyond the standard 15% threshold. While many may dream of moving south to Florida and spending your retirement days on beaches, you have to be realistic. Does your income support this?  Can you save enough to make this a reality?
Top tip for your 20s: Save 15% of your income for retirement.
Mistakes to avoid: Putting off research, learning, and saving for later.

saving-for-retirement-in-your-30sPreparing for Retirement in Your 30s

Whereas the 20s can be somewhat tumultuous as you get settled into the working adult life, the 30s are often benchmarked by increased stability, which is often reflected in your financial situation.
By the time you are 30, you have likely built up experience and put in time at your job, which typically results in pay raises. Alternatively, you might have switched to a higher-paying job. These perks increase your opportunities when saving for retirement. 

Increase Your Savings? ...or Pay off Debt?

As your pay increases, consider investing more into your retirement account. Committing an additional 1% with each pay raise can make a big difference. Try meeting the max contribution amounts for your retirement account if you are not already. If you already are meeting these, consider opening an additional type of account.
Do you still have a lot of debt?  If so, you might be trying to decide between spending more money paying this debt off or putting more money into your retirement account. While people seem to gravitate more towards paying off debt, this is not necessarily always the correct answer. Always try to pay off high-interest credit card debt. However, if you have lower interest loans such as a mortgage, and your investment options are earning a higher interest rate than you are paying on your loans, it could be more cost-effective to put this money into your retirement savings.

Don’t Cash Out Your Account

Many people, when switching jobs, will decide to cash out their retirement account rather than rolling it over. Financially, this is a big mistake. When doing this, you lose out on the compounding interest. You must pay the income taxes, as well as an additional 10% penalty. Better options are rolling your account over to an IRA, or to a 401k with your new employer.

Just Getting Started?

While it is ideal to get started investing as early as possible, the increased stability that your 30s bring is often the time that many people begin to take saving for retirement more seriously. So, if you are just getting started, don’t fret. While this article suggests a level of 80% of your yearly income after retirement, this is not a hard and fast rule. Many others that suggest 70% of your income, therefore, the 15% benchmark should still help you reach adequate retirement goals.
If you are just getting started in your 30s, it is a good idea to take the above steps more seriously, particularly adding an extra percent to your savings when you get a raise, to help ramp up your savings. The 30s are a decade in which a lot of growth can happen in your retirement account. By age 40, experts agree that you should have two to three times your annual salary saved.
Top tip for your 30s: Increase your retirement savings 1% with each raise.
Mistakes to avoid: Cashing out your investment account when switching jobs.

saving-for-retirement-in-your-40sPreparing for Retirement in Your 40s

Ideally, by age 40, you should have two to three times your annual salary saved, and then six times at the end of your 40s, by age 50. As your retirement accounts are growing and you are inching closer to retirement, you might be wondering what else you can do to prepare.

Assess Your Finances

Take an in-depth look at your retirement savings. You might even take the time now to sit down with your financial advisor to ask the following questions: Are you on track to meet your financial goals?  Are you investing your money in the most beneficial accounts?
This is the time to prioritize paying off debt. While you should still consider whether you will earn more in interest in your retirement account rather than you are paying, not having to make debt-related payments will be a significant financial benefit during retirement.

Maintain Aggressive Investing

In their 40s, many people believe it is time to switch to more conservative investment options. However, unless you retire early, you are still around 15 to 20 years away from retirement. Experts advise still maintaining an adequate amount of risk in your portfolios to maximize your earnings. Review your finances 10 years before your planned retirement date to determine where it might be more beneficial to switch to more conservative options.


Diversify Your Investments

Start with your 401k. If you are able to make the maximum contribution amounts here, start contributing to your IRA. Contact an investment professional to open a traditional brokerage account for which you can withdraw money at any time. Spreading your funds across all accounts will ensure maximum earnings, along with a variety of tax breaks. Having a combination of taxable and non-taxable accounts increases your flexibility. 

Just Getting Started?

Don’t panic!  If you start saving at 40, you can still reach your retirement goals. Begin by trying to put 20% of your paycheck straight into your retirement account if possible. The Dave Ramsey website lists that starting at 40, in order to retire in 25 years with $1 million dollars, you would need to invest $800 a month into your retirement.
Get started saving!  If these amounts seem high for your budget, review your debts and see if you can consolidate any loans into lower interest accounts. In fact, by 40 you might have more debt paid off and a higher income to help with these payments. Consider things such as lowering expenses or extending working time to help meet these obligations. Working a couple of additional years could reduce this $800 a month to $650.
Top tip for your 40s: Diversify your investments to increase your flexibility.
Mistakes to avoid: Switching to conservative investments too early.


Understanding Your Finances

In order to understand where your finances stand in relation to retirement, it mostly comes down to financial calculations. While consulting a professional is suggested to ensure that you are on track, there are many tools available to make some calculations at home and increase your knowledge. Here are a few additional resources:
The 4% rule is a general rule of thumb stating that you can safely withdraw 4% of your savings for each year of retirement. Review your account balance and see if 4% of your savings would be feasible to live on in a year. Remember that this likely won’t be your sole source of income. You should still receive social security, and, if applicable, a pension.

There are four key retirement metrics to consider:

• Yearly Savings Rate
• Savings Factor
• Income Replacement Rate
• Potentially Sustainable Withdrawal Rate
The retirement section of US News lists some additional retirement metrics to consider:
• Financial Independence Number
• Retirement Replacement Ratio
• Age Based Salary Multipliers
• Net Worth
You don’t have to perform all of these calculations yourself. Our partner brokerage service has this handy retirement savings calculator that can help you quickly figure out how much you should be saving and if there are any shortfalls to your current plan.


Important Takeaways When Saving for Retirement:

  • Take advantage of compounding interest by getting started saving as early as possible.
  • Put at least 15% of your income into your retirement savings, and possibly more based on age and other factors.
  • Take advantage of employer matching programs.
  • Increase your retirement savings by 1% with each raise.
  • Don’t cash out your accounts.
  • Maintain aggressive investing.
  • It is never too late to get started saving for your retirement.


Let's Plan for a Bright Future, Together.

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