In a world where Twitter followers, YouTube subscribers, and viral videos can make kids millionaires in minutes, it makes us wonder what retirement will look like for future generations. A question I’m often asked by Millennials, in particular, is how to get started with retirement planning and investing in their 20s and 30s.
As an investment advisor, my answer is, of course, it’s truly never too early to start saving towards retirement.
While your 50’s and 60’s may seem like a lifetime away, it’s always best to start developing a plan to work towards your goals. There’s something all generations have in common – we were all once where you are right now. At some point, almost everyone has just landed their first job, gets married, starts a family, buys a home, and can’t imagine life slowing down.
Most people spend more time planning for a vacation than they do strategizing for their retirement. Even if it seems small now, your future earnings for saving dollars today will not be so small by the time you need them – when the paychecks aren’t coming in anymore.
At Capital Investment Advisors, we like to keep things simple. So simple that we’ve developed an acronym as a guide for anyone trying to save towards a successful retirement – TSL, which stands for Taxes, Savings, and Life. Here’s how to get started building a muscle in saving for the future.
TSL – a Simple Savings Plan
Taxes – Sorry, there’s nothing fun about taxes, and there’s no getting around them. You can expect to pay roughly 25% in taxes on the income you earn in any given year. Fortunately, there’s nothing that needs to be done here, but to continue working hard, as taxes will be directly debited from your paychecks. If you’re self-employed, you generally would allocate 10 – 15% of your gross pay into a savings account and pay taxes quarterly, so you don’t end up surprised at tax time, but speak to a CPA about your specific situation.
Savings – As a general rule of thumb, aim to save 25% of your overall gross income annually. The typical best place to start is with your company’s 401(k). Most companies match a certain percentage of your contributions – that’s free money toward your retirement! From there, explore a Roth IRA or a brokerage account. These savings should be invested in equities, so they have 30+ years to potentially grow.
The next step is bumping those contributions up each time you receive a pay increase. If you get in the habit of doing this, you won’t miss those small increments, and they’ll make a big difference.
While we’re on the subject of savings, you also need to have at least 3-6 months of living expenses in an emergency fund. Whether you lose a job, get a flat tire, or have an unexpected medical expense, it’s much better to have money on hand when life throws you a curveball. I know it’s easy to pull out a credit card, but you end up paying the initial expense, plus interest month after month.
Life – Here’s where the fun comes in. You can spend the remaining 50% (yes, that’s half) of your gross income on everything and anything else. If that next package you were going to order from Amazon fits into that 50%, then go ahead and buy it with no remorse!
Now, once you start paying attention to where your money is going, you might notice that 50% gets whittled down quickly as you pay your bills. Many Millennials also have student loan debt that takes a bite out of their budget. I encourage you to take a look at your monthly expenses and see where you can trim. Can you save a few bucks on your phone or car insurance? Can you brew your own coffee, cut back on Uber rides or GrubHub deliveries? Those trips and tips add up. I’m not asking you to take all the fun out of life, just become more aware of your spending habits and see where you can save a little bit more.
Remember that the above percentages serve as a baseline framework. Depending on your income and lifestyle, these three areas may fluctuate over time.
When the Going Gets Tough, the Tough Keep Saving
Life happens. Don’t stress out if you’re not always 100% on track toward achieving this framework. But you’ll find the challenges that come your way are easier to manage when you have debt paid off and you’re saving money toward your goals. One of the biggest mistakes you can make on this journey is withdrawing money early from your retirement accounts. Decide right now that you just won’t do it! Not only are there major tax implications, but you’re also typically required to pay the money back, which delays your retirement goals. Stay present to your goals by taking time annually to reassess your overall situation and make tweaks, as needed.
We all have to start somewhere. When you’re young, you want to get your money working for you as quickly as possible, for as long as possible. If you can stick to TSL, you’ll be well on your way toward a rewarding retirement!