Beginning to Save Starting to Save
The first step on your savings journey should be to open a savings account and begin setting aside a portion of your pay as an emergency fund. While your savings goal will vary depending on your salary and expenses, having roughly six months of living expenses saved up is ideal. You likely won't be able to amass that level of savings quickly, so start with a smaller goal of having a total of $1,000 in savings and regularly add to it over time. Each little bit you save will give you peace of mind the next time an unexpected expense pops up.
As you build your emergency savings, look to kick off your retirement savings by contributing what you can to a qualified retirement account. Individual Retirement Accounts (IRAs), 401(k)s, 403(b)s and government Thrift Savings Plans (TSPs) are all excellent options that allow your money to grow tax-deferred.
No matter how little, contribute what you can to your selected plan. Any time you see an increase in salary, receive a bonus or have some other boost in income, increase your contributions. Delaying saving until you have more money to contribute could mean less funds in the future, as your investment won't have as much time to earn compounding interest.
Ideally, you'd start saving in your 20s, contributing a portion of the first paycheck you earn and working toward a 15 percent annual contribution as time goes on. Starting to save early on can make a big difference down the road.
Begin saving at...
- Age 25
- $3,000 a year
for 15 years
- = $160,000*
at age 65
- Age 40
- $3,000 a year
for 25 years
- = $130,000*
at age 65
As an example, you begin saving at age 25, putting aside $3,000 a year for 15 years in a tax-deferred retirement account. After 15 years, you stop saving. Assuming a four percent annual return, when you reach age 65, the $45,000 investment you made all those years ago will have grown to more than $160,000, despite halting your contributions at age 40.
On the flip side, if you don't begin saving until age 40, but start your contributions at $3,000 a year for 25 years, by the time you reach age 65, you'll have set aside $75,000. Unfortunately, assuming the same four percent annual return, it will have grown to less than $130,000.
Most people will need at least eight times their final salary by age 67 to fund retirement at 85 percent of pre-retirement income (for example, a final salary of $50,000 would require $400,000 in savings). Or, aim for saving the equivalent of one year of your salary by age 35, three times your salary by age 45 and five times your salary by age 55. Use the salary you're earning at each age to calculate the corresponding benchmark. To get a basic idea of what those numbers might be, use your current salary, average yearly increase and number of years you have to reach those ages.
While starting early certainly makes you an advantaged saver, it's never too late to begin saving. Rest assured that as life, career and income expand, you'll be able to readjust your contributions to further increase your savings.
*Approximate savings total
Next: Making a Plan
Not sure where to start? Contact a financial advisor at 1-877-221-8108.