If you’re in your 20s or 30s, saving for retirement is probably the last thing on your mind. You’re probably still trying to figure out how to survive on your own and are living from paycheck to paycheck. Don’t worry — we get it!
So, how does retirement come into play when you can barely make ends meet? And where do you even begin with any form of savings? Truthfully, it doesn’t need to be that difficult!
These few steps listed below can help you form a stress-free saving plan to ensure you’re comfortable by the time your pension days roll around.
Why should I save for retirement?
Saving for retirement — and starting right now — is crucial for several reasons, including:
- Financial independence. Building a retirement fund ensures that you can maintain your standard of living without relying on others, such as family or government assistance, during your later years.
- Longer life expectancy. With people living longer, you’ll need enough savings to support yourself through an extended retirement period — especially considering how social security benefits may not be enough to cover all expenses.
- Rising healthcare costs. As we age, healthcare expenses typically increase. Saving for retirement allows you to cover medical costs, insurance premiums and unforeseen health issues without financial strain.
When is the best time to start saving for retirement?
The best time to start saving for retirement is as early as possible.
Starting in your 20s or as soon as you begin earning allows you to take full advantage of compound interest, where your savings grow over time. Even small contributions made early can significantly increase your retirement fund due to the longer investment period.
Starting early also reduces the pressure to save large amounts later in life and provides more flexibility in adjusting your financial goals. Simply put: the earlier you begin, the easier it will be to build a secure financial future for retirement.
How can I balance my retirement savings with my other goals?
Balancing retirement savings with other goals requires careful and strategic planning.
Start by making a budget to see where your money is going, and make sure you’re setting aside funds for both short-term priorities, like paying off debt, and long-term savings for retirement. Prioritize your goals and, even if you start small, aim to save consistently. Meanwhile, automating contributions to your retirement account and other savings can help.
As your income grows, gradually increase your savings. Check your progress regularly and adjust your plan as needed. This way, you can meet your short-term goals while building a secure future.
Do I need a private pension?
This largely depends on your financial goals and retirement plans.
A private pension can be a smart way to supplement other income sources, like social security or workplace pensions, ensuring you have enough savings to maintain your lifestyle in retirement.
If your employer offers a pension or 401(k), contributing to that is a good start, but a private pension (like an IRA) can offer additional tax benefits and more control over your retirement savings. If you're self-employed or don't have access to a workplace plan, meanwhile, a private pension becomes even more important to secure your financial future.
What type of account do I need for retirement savings?
For retirement savings, there are several types of accounts you can consider, depending on your situation, which we’ll explore below:
- 401(k): Contributions are typically tax-deferred, and many employers offer matching contributions, which is essentially free money for your retirement.
- Solo 401(k): If you’re self-employed, a Solo 401(k) allows higher contribution limits and tax advantages similar to a standard 401(k).
- IRA: An IRA is available to anyone, and it offers tax advantages. There are two main types: a traditional IRA, where contributions may be tax-deductible and earnings grow tax deferred until withdrawal, and a Roth IRA, where contributions are made with after-tax income but withdrawals in retirement are tax-free.
- SEP IRA: Simplified Employee Pension IRAs are ideal for small business owners or freelancers. They allow you to save for retirement with tax-deferred growth.
Each account type offers different benefits, so choose based on your income, employment status and tax preferences.
Tips to start saving for retirement
So, how do you go about saving for retirement? These 12 tips are a great starting point!
1. Start early
If you happen to be in your 20s and you’re reading this, great! Now is the perfect time to start putting your hard-earned cash away and watch it grow!
If, on the other hand, you happen to be older, don’t panic! Although you won’t have as much money as you would have had if you started saving 10 years earlier (unless you double your investments, of course), there’s still a way to turn this around and have plenty of savings for your retirement.
For example, if two people saved the same amount of money each year (let’s say $5,000), earning a 6% return on their investments, by the time they retire at the age of 65, one will end up with nearly twice as much money (up to $50,000 more) by starting at the age of 20 instead of 30.
2. Use a personal retirement calculator
By using a tool like a personal retirement calculator, you’ll be able to have a clearer picture of what you can or need to save every month and at what age you’ll be able to retire.
By doing so, you’ll set a goal that you’ll need to work towards, and you can even track milestones along the way. If you’ve reached a milestone, why not set yourself a small reward for your saving efforts?
There are a handful of personal retirement calculators suitable for any location — but if you can’t seem to get on with them, consider hiring a financial adviser who will be able to put all your accounts in order and give you a unique saving plan to follow.
3. Follow the 50/20/30 rule
Your life doesn’t have to be completely dull because you’re saving for retirement — you can have a balanced lifestyle and still enjoy yourself by following the 50/20/30 rule.
If you’re intrigued to find out what the rule is, here’s a breakdown:
- 50% of your monthly income should go towards your essential expenses, including bills, food, transportation and housing.
- 20% of your monthly income should go towards financial priorities, including student loans and other debts, mortgages, retirement contributions and savings.
- 30% of your monthly income should go towards your lifestyle, including outings, gym memberships, personal care and gifts.
So, as you can see, you still have plenty of money to enjoy yourself — you just need to be a bit savvier with your spending and your savings. As a wise man once advised me: don’t spend beyond your means!
4. Figure out how much you need to save
Many young people think that they can rely on their social security or national insurance, but the truth is not as many workers are investing to ensure they’ll receive the return that they’ve been promised — and you just never know when the government will choose to change pension policies!
Instead, it’s best to have your own security blanket to fall back on. This safety net will depend on the type of life that you lead, and as everyone’s lifestyle differs, you’ll need to figure out how much it is that you need to be comfortable in your old age.
When it comes to retirement, there’s the 4% rule, stating that you should withdraw 4% of your savings per year. So, let’s say you need $32,000 to live comfortably a year; this means that your entire savings should accumulate to $800,000 if you expect to have 25 years of retirement.
5. Invest in a 401(k) plan or employer-funded private pension
If your employer has a 401(k) plan or a private pension scheme in place, you should take full advantage of it. The funds are automatically taken from your paycheck (so you don’t even know you had them in the first place) and, in most cases, your employer matches your contribution.
The plus side? The money is also deposited in your retirement plan pre-tax, so less of your gross income is being taxed. The restrictions on when you withdraw your funds differ from company to company, so it’s wise to investigate this beforehand.
6. Open a Roth IRA
If your workplace doesn’t offer a 401(k) plan, don’t worry! You can opt for a Roth IRA, instead. The only difference is that you will send taxed money to your account, but when you withdraw the money, it will be tax-free.
There is a limit on how much you can invest on a yearly basis, but this does differ between banks/building societies, so you will need to research before you settle with a specific company.
7. Consider opening a high-yield savings account
A high-yield savings account is a great alternative for the average worker, as long as you can resist breaking the bond on your account.
High-yield accounts are, essentially, the same as a regular account with a set interest rate (usually between 1.5% and 2%), but they come with a restriction: you can’t touch the money unless you break the bond and pay a penalty fee.
But let’s say you invest $1,000 in over 10 years with an interest rate of 1.55%; you will have a total balance of $1,167.54. The great thing about this is that you don’t have to wait until retirement to tap into your savings if needed.
8. Review your spending habits
If you’re young, you probably think that you have nothing to worry about! Reward yourself for your hard work with weekly happy hours and daily dine-outs, right? Wrong!
Although you might not think about it now, your lavish spending habits are negatively affecting the quality of life that you will have later on!
Start thinking about your later years now, and rein in your spending habits. You can start by reviewing everything that you spend your money on and make reductions, such as weekly spending allowances and cheaper insurance, helping you save more for your retirement.
9. Invest in property
As house prices are on the rise, investing in property seems like a safe bet for retirement. You can either increase your initial investment by cashing out and selling in 20+ years, or you can earn a decent amount of income by renting your property.
This option, however, does come with higher risks. There are taxes, faults and fixtures, and landlord duties that you need to take into account when you own a property.
10. Save any extra funds
Did you get a raise? Do you have access to an inheritance or receive a tax refund?
Don’t put this money towards your spending allowance. Instead, be strict and place it straight into your retirement pot! While you might be resenting the idea now, you’ll be thankful when you have a comfortable cushion to fall back on at retirement!
11. Calculate how much you’ll need
While it’s all well and good calculating how much you can actually save (the more, the better, right?), it’s important to identify how much money you will need once you’re retired.
You’ll need to take into account the growing rate of living expenses and also note that your daily spending will be higher since you won’t be at work for eight hours a day. You’ll also naturally spend more money if you do things outside of your house.
12. Get rid of any debt
By the point of retirement, you don’t want any looming debts hanging over your head! So, start making a plan now of how you will pay back any personal and business loans and when your mortgage will be paid off.
If you want to get serious about saving for your future, start paying back any money that you owe. Besides, repaying loans faster will probably wipe off some money that you would have simply paid in interest alone.
Learn how to save for retirement while enjoying the present:
Final thoughts
Saving for your retirement sounds like such a complex matter, but when you look a little closer, you can see that it’s not actually that complicated.
It’s best to assess your current finances, pay off any debts and set up the right plan for you. Whether you decide to invest in an account or property is entirely up to you. The main thing is to start your pension-saving journey today!
What type of pension scheme do you have or would you choose to have? Join the conversation below and let us know!
This article is a partial update of an earlier version originally published in 2018.