Karen Smith represents a distinct minority in American life: She knows how much she needs saved for retirement and has a plan to get there.
Smith, an engineer who lives outside Birmingham, Alabama, wants $2 million put away by the time she retires in five years. She estimates a 3 percent withdrawal rate, combined with a pension, would give her an estimated $70,000 in retirement income, before taxes and Social Security.
Compare Smith, 50, to her peers.
Just 3 in 5 households led by some between the ages of 45 and 54 have a retirement account, with a median value of $83,000, while 13 percent of those in their 40s own no retirement savings whatsoever.
More broadly, 56 percent of Gen Xers have no idea how much they’ll need for retirement, according to a recent Bankrate survey, and half of all working families will endure a lower standard of living when they retire, per the Boston College’s Center for Retirement Research. This may be why the biggest regret among Americans is not saving more for retirement.
Clearly, something is going wrong.
Below you’ll find tips for what you can do to improve your ability to save and what goals you should be aiming for.
Everyone is different, so retirements needs will vary. But in the end, we all need a cushion to finance the last bit of our lives. Very few wind up working all the way until the end.
How to save in your 20s
Your goal: By the end of your 20s, aim to have as much in your retirement accounts as you earn in a year.
Build your emergency fund
Start small. Financial advisers recommend you have six months’ worth of essential expenses stowed away in a high-yielding savings account. That’s a rather daunting task for someone just starting out in their career.
You don’t have to get there all at once. Aim for one month’s worth (about $3,500 for the average 30-year-old) and the go from there. A fully funded emergency fund will stop you from dipping into your retirement accounts if you’re ever in need of cash, which would cripple your ability to count on compounding interest.
Start saving for retirement
Save at least 10 percent of your pay, including any employer match, in a tax-preferred retirement account, such as a 401(k). More than three-quarters of full-time jobs offer a retirement benefit, according to the Federal Reserve, and new workers may be auto-enrolled in one. Which is great, except you may be set up to save a smaller portion of your salary — say, 3 percent — than what’s recommended. Make sure to increase your contribution or at least set up an auto-escalation so that you put in more each year.
If your employer doesn’t offer a 401(k) or you’re a part-time worker, consider a Roth IRA. You can save $5,500 in after-tax income, but the money grows tax-free and won’t be taxed when you withdraw the funds in retirement.
The irony of retirement savings is that you need to start young. To fully enjoy the power of compounding interest you need to maximize the years you give yourself to save.
Let’s assume you start saving $5,000 annually at 22 and continue to save that amount until you turn 67. (In real life, of course, there’s inflation, raises and other expenses, but let’s put that to the side for now.) Assuming an annual return of 6 percent, you’ll end up with $1.13 million by the time you reach full retirement age. Compare that with someone who starts saving a decade later and has only 35 years until retirement. That person will have to save nearly twice as much money each year to end up with the same amount by 67.
Use Bankrate’s 401(k) calculator to see if you’re on track to reach your retirement savings goals.
Play it aggressive and put a high percentage of your portfolio in stocks. When you’re in your 20s, you have a long investment horizon. That means you can handle the ups and downs of the market.
Check out this asset allocation calculator to create a balanced portfolio of investments that fits your time horizon and risk tolerance. Instead of picking individual stocks, look to mutual funds, exchange-traded funds or a target-date fund to diversify your investment portfolio.
How to save in your 30s
Your goal: By 35, have two times your salary saved in your retirement accounts, on the way to three times that figure by 40.
Ramp up your emergency fund
Your 30s are when you really start to grow up financially. The largest portion of homebuyers, for instance, are those age 37 and younger, according to the National Association of Realtors, with a median age of 31.
Maturation, though, means you have more to lose. A late mortgage payment is a wholly different situation than missing rent. You don’t want to lose your house, which increasingly becomes filled children. Now is the time to increase that one- to three-month emergency fund to something closer to six months.
Thankfully, the Federal Reserve is raising rates as the economy improves from the worst financial crisis in nearly a century. That should lead to to higher yields on savings accounts.
Ramp up your retirement savings
Average household earnings jump from $66,500 for 25- to 34-year-olds to $92,500 for 35- to 44-year-olds, according to the Bureau of Labor Statistics. This is the time in your life when you start earning real money, which makes it even more important to save for retirement. If you’ve fallen behind on your 10 percent goal, make it up now. If you’re already saving that much, increase it to 15 percent.
Get on the same page as your spouse
Roughly half of Americans have been married by the time they turn 30, and more than three-quarters of people in their 40s have that honor, according to Overflow Data. (Compared with just 4 percent of 20-somethings.) This means you’ll likely tie yourself to someone in your 30s, both romantically and financially. The two have a way of affecting each other.
According to Bankrate’s sister site Creditcards.com, 23 percent of Americans in relationships have hidden financial account, such as a credit card or a savings account, from their spouse, while nearly a third of respondents said such infidelity is worse than physical cheating. Successfully reaching your retirement goals will depend on clear communication with your spouse on all things financial, from the budget to how much to save to what you want to do in retirement. Research shows that a happy marriage leads to personal happiness in retirement.
How to save in your 40s
Your goal: Aim for four times your earnings saved by 45, and six times by 50.
Pay off debt
Slightly more than half of families carry a credit card balance in their 40s, according to the Federal Reserve, with a median balance of about $3,000. (The mean is $7,000, which shows that those with debt are at risk at having a lot of it.)
Eradicating that burden can go a long way to freeing up more money to put toward retirement. Sign up for a no-fee balance transfer credit card with a long 0 percent interest period so that you give yourself time to pay off your credit debt. Someone with a $7,000 balance could erase their debt with fifteen $467 payments before interest kicked in.
Once the debt is paid and you’re sufficiently used to living without that money, raise your retirement contributions by a similar amount.
Don’t get too conservative
At 40 you’re still a long way from retirement, so don’t rush to play it too safe, says Ellen Rinaldi, former executive director of investment planning and research at mutual fund company Vanguard and currently the firm’s chief security officer.
As a rule of thumb, Rinaldi recommends scaling back stocks to 80 percent of your portfolio and putting the balance in conservative holdings like bonds. Maintain a broad view of all of your holdings as you reallocate assets. It’s not just enough to focus on the 401(k). Take all of your investments into account. Make sure you haven’t forgotten anything, either, like a 401(k) or other benefits you may have earned at previous jobs. If it’s an old 401(k), roll that into an IRA, which you can invest any way you want.
“It happens all the time — people leave money in a 401(k) and forget about it,” says J. Michael Scarborough, president and CEO of Retirement Management Systems. “They take more time on their vacation than they do on retirement planning.”
Put college savings in perspective
Hopefully you’ve been saving for their higher education since your kids were in diapers. If so, you’ll be able to keep chipping away without diverting huge sums of cash from your retirement savings. If you’ve neglected to save for college and your 401(k) is less than robust, you may not have enough money to fund both.
Many parents often sacrifice their own retirement planning to care for kids — even those who have already graduated from college. That can be a big mistake.
“When forced to make a choice, people support their own children first. They’ll put themselves last,” says Merl Baker, principal at the financial consulting firm Brightwork Partners. “They’re reconciled to working longer than they planned or expected to. Or they accept a lower quality of life. It’s pretty powerful.”
If you’re determined to help your child and money will be tight, look for compromises that may have less of a negative impact on retirement savings, such as sending your child to a local, in-state school instead of an expensive private college.
How to save in your 50s
Your goal: Aim for seven times your earnings by 55, and eight by 60.
Take advantage of catch-up contributions
Turning 50 has some advantages, including contributing more to your retirement account tax-free. In 2018, individuals age 50 or older can save up to $24,500 in a 401(k) and up to $6,500 in an IRA. Take advantage of these opportunities.
“It’s not hopeless!” says Dee Lee, CFP professional and author of “Women & Money.”
To illustrate, Lee describes a couple who decide they need to do some belt-tightening. If each contributes $10,000 a year to a 401(k) plan, they’ll have about $90,000 each after seven years, assuming the money grows by 7 percent a year.
But that’s a big assumption. Your portfolio will have to shift well in the direction of stocks, and stocks will have to rise when you need them to. That’s been easy-pickings in the near-decade after the Great Recession but was a recipe for disaster in the 2000s.
Historically, stocks have earned just over 10 percent a year, while bonds have clipped along at roughly 5 percent. If you’re unwilling to invest in stocks, you may well wind up short of your goals.
Those in their 50s, nevertheless, are generally too young to flee to the safety of cash instruments.
“This is not the time when you go to cash,” Rinaldi says. “You may stay 50-50 in stocks and bonds. But you’re going to need growth in your portfolio.”
Figure out your retirement budget
How much is enough? That depends on your lifestyle and expenses, potential medical bills and the kind of support you’ll have from, say, a pension plan and Social Security. But, as you review your savings goals, be careful not to set the bar too low. Nearly three-quarters of Americans underestimate how much they’ll need to maintain their standard of living in retirement, a Fidelity survey found.
“People typically don’t downsize,” says Harold Evensky, CFP professional in Coral Gables, Florida. “It’s not uncommon for them to spend more in retirement than less.”
Fill out a comprehensive retirement expenses worksheet to get a sense of where your money is going when a paycheck is no longer coming in.
To get a more personalized account, contact a fee-only Certified Financial Planner, and make sure they put your needs before their own. Start your search at the Garrett Planning Network.
Plan for bad health
Safeguard your finances against unexpected medical costs. Some hefty medical bills can quickly eat up a lifetime of savings. A couple in their mid-60s will need $280,000 to cover health care costs in retirement, according to a 2018 Fidelity Investments estimate.
Then there’s the stratospheric cost of extended care at nursing homes. A report from Genworth says the median annual cost of a semi-private room in a nursing home was $85,776 in 2017.
With that in mind, retirement planning must include some consideration of future medical costs. One option is long-term health insurance, which pays for extended medical care including such things as nursing and assisted living — which can be expensive. “It has to be easily affordable not just for today but for whole premium period,” says Marilee Driscoll, founder of Long-Term Care Planning Month, a public-awareness effort each October.