Retire Rich: 6 Steps to Saving for Retirement in Your 20s and 30s

By Stacey Rapacon/ TNJ | 5/25/2016, 10:34 a.m.
When you're young and vigorous, retirement seems far off. Bills due today are far more demanding than a goal you ...

When you're young and vigorous, retirement seems far off. Bills due today are far more demanding than a goal you won't reach for decades. But putting off saving is a mistake. "There's one advantage that millennials have over baby boomers, and that's time," says Kyle Ramsay, investing manager at personal finance site NerdWallet.

Forfeiting that advantage now puts you at risk of having to retire later than you want or under less-than-ideal circumstances. In fact, a recent NerdWallet study estimates that 2015 college graduates won't retire until age 75, compared with a current average retirement age of 62. Even if 75 doesn't sound like an unreasonable retirement age to you, reasons beyond your control, such as health problems or being laid off, may force you out of the job before you have enough savings to retire comfortably. Instead of planning to work longer, you're better off saving now. Here are six steps to get you started.

  1. Create a budget that includes--and prioritizes--retirement savings.

With rising rents and big student-loan debts stretching their budgets, young adults may feel like they can't afford to save for retirement, says Ramsay. But you should make retirement a part of your financial plan as soon as possible. Any little pain you feel from tightening your budget and squeezing out some savings now will be much easier to take than realizing too late that you haven't saved enough.

One rule of thumb is to save 10% to 15% of your pay for retirement. It's okay to save less than that; any little bit you can muster each month is better than not saving at all. Financial coach and planner Shanda Sullivan suggests starting to save as little as $5 each month. Then increase your savings by $5 every month until you're comfortable adding even more. "You won't even notice it," she says. "Increase it a tiny bit at a time, and you will find saving is a lot easier than you thought. It's just creating that habit of saving."

Getting started sooner rather than saving more later works out better mathematically, too. Let's say you're 30 years old. If you save just $100 now and add another $100 every month for the next 35 years, you'll wind up with $142,302, assuming a modest 6% annualized return. If you wait until you're 40 to start, even if you double your savings to $200 a month, you'll only hit $138,852 by age 65. (Of course, these amounts will not be enough to cover your retirement years, but you can see the benefit of saving a little now versus trying to catch up later.)

  1. Capture your employer's 401(k) match.

If your employer offers and contributes on your behalf to a 401(k) or similar retirement plan, that should be where you save first. Definitely put enough in the account to capture the company match. "If you don't, you're leaving free money on the table," says Sophia Bera, financial planner and founder of Gen Y Planning.

For example, if your boss offers to pay 50 cents for every dollar you contribute up to 6% of your salary, which is a common policy, you should defer at least 6% of your pay to the account. In this example, your savings add up to 9% of your pay--6% from you and 3% from your employer. That leaves you just a bit short of the goal of saving 10% to 15% of your salary.