The thought of saving for retirement is enough to send many young Americans into a spiral.
When it comes to figuring out how to cobble together hundreds of thousands of dollars (or more) by retirement age, it’s hard to know where to start. The question of how much to put away is a particularly sticky one, because there isn’t a one-size-fits-all response — it depends heavily on one’s spending habits, lifestyle, and future needs. Still, there are some general guidelines that everyone should keep in mind, no matter where they are in their retirement savings journey.
Here’s how to start saving (if you haven’t already)
If you haven’t started saving for retirement, there’s probably a reason why, says Chatzky. “Getting started with your savings starts with taking a good look at where your money really is going — and where it should be going instead.”
Chatzky recommends first taking stock of credit card statements, bank statements, and even Venmo history to get a thorough understanding of your current financial habits. “Do this for at least a month, and you’ll start to see where you can make changes,” Chatzky says.
Getting used to saving every month is most of the battle, according to Chatzky. “The habit is so much of the process. I don’t want to say it’s as important as the amount, but it’s really key,” she says, adding that creating a new habit doesn’t just boost your funds: “It’s the key to building your confidence — knowing you can actually do it.”
Here’s what kinds of accounts you should consider
Between IRAS, 401(k)s, and different stock options, there are a lot of different choices for saving for retirement, and sometimes things can get confusing. Chatzky recommends a few ways to simplify the process, depending on your situation.
“If you’re offered a work-based retirement account and have the opportunity to participate in a 401(k) or a 457 or 403b, then that’s a good place to start, as it’s already set up for you,” Chatzky says, noting that one of the biggest hurdles for people when setting up a retirement account is the degree of administrative difficulty. “If you don’t have these options, then you have to set it up for yourself.”
So, what if you don’t work for a company that offers one of these accounts? Chatzky recommends opening up a simple low-cost portfolio that you can use to stay on track, such as a target-date retirement account. “With this, you pick a date close to the time you believe you’ll retire, and you can call it a day,” Chatzky says, though she does still stress the importance of making monthly contributions a habit: "You have to make sure your contributions get automated or it’ll never happen.”
If you’re interested in putting away more than $7,000 a year, you can also look into a Self Employment Pension (SEP) IRA, which allows you to set aside up to 25% of your self-employment income, to a max of $56,000.
Here’s how much you should aim to save
While savings goals do vary depending on lifestyle and income, Chatzky says that most people need to save around 15% of what they earn in order to successfully accumulate enough to replace their income during retirement. And while 15% is a great number to aim for, Chatzky says you don’t have to start there — you can increase gradually. The ultimate goal is to get into a habit of moving your money out of your spending account and into your retirement account on a regular basis.
But saving regularly can sometimes present a challenge, especially for freelancers or anyone not on a fixed income. In these circumstances, Chatzky recommends taking a look at average income, over the past six or 12 months, depending on which would be a better representation.
From there, Chatzky says to deposit your pay directly into your savings and transfer your average monthly income into your checking account each month. “This leaves a bit of a safety net, so that during months when you’re not making enough, you can pull from savings,” Chatzky says. She adds that you can make automatic contributions to your retirement account based on a number that works with your average income, and change the amount incrementally as your income increases.
Once you’ve created (and, preferably, automated) a habit of saving each month and invested your money into a target-date retirement account, it’s best to forget about it. “Setting and forgetting is the only thing that works,” Chatzky says, adding that when the markets are down, it can be tempting to make rash decisions. However, it's in these times that you’re actually more likely to make gains, since you'll buy more shares at a lower price. “When markets are down, hold on to the number of shares, not the price of what you're buying," Chatzky adds.
The bottom line
Though finding the right type of retirement account and investing wisely is important, the worst thing you can do is to put off getting started with saving — even if it's just a small amount every month. “You have to realize that you can’t out-invest your way out of a savings shortage, it just doesn’t work,” Chatzky says.
To be sure, creating the habit of setting aside a bit of money instead of spending it on dining out (like 49% of millennials currently do) can make all the difference over the course of a few decades. And while most millennials will roll their eyes when people suggest cutting down on the avocado toast, there's a lot of truth in it.
“Saving, though it sounds like the easy part, is the foundation you’re building on,” Chatzky says. “Not saving enough or believing in its importance is the biggest mistake you can make.”