Planning for retirement may not seem important now because it’s so far into the future. But the reality is, the earlier one starts to save, the better.
This is because money in a retirement account compounds — or accumulates, more interest over time.
The key to being able to retire in comfort is allotting enough time for the retirement savings to grow. So, saving for retirement should be a financial priority by the age of 30.
In fact, by 30, the ideal amount to have saved for retirement is equivalent to a year’s income — pre-taxed.
Of course, this is not a requirement but rather a guideline. There are several factors to consider when it comes to saving for retirement — including your current salary or income, planned retirement age, and desired lifestyle.
All these details must be accounted for to determine how much you should save in your 30s for retirement.
Use the 15% Rule as a Guide
Many financial advisors suggest using the 15% rule as a starting point when an individual begins saving for retirement at 30.
Under the 15% rule, individuals in their 30s who want to retire by their late 60s should set aside approximately 15% of their gross annual salary towards retirement each year.
The 15% rule assumes the desired yearly income in retirement is equivalent to at least 55% of the pre-taxed or gross annual salary made before retiring.
This adds up to a total of 10 times a single year’s gross income to spend throughout one’s retirement.
Those who predict they’ll have more medical expenses in the future or see themselves going on multiple vacations a year may want to set aside more — approximately 80% of their pre-taxed annual income.
Ultimately, the amount put towards retirement depends on the individual’s lifestyle and projected needs.
Start Small & Increase
For many in their 30s, setting aside at least a year’s salary towards retirement is an overwhelming thought. And it might not be necessary to support a comfortable retired lifestyle, rather it is simply an estimate.
In the United States, the retirement age at which one can receive their full benefits is 67. This includes total access to one’s pension plan or retiree income, and social security benefits.
Those who prefer to wait until their 70s to retire may not need to save as much.
Alternatively, individuals who want to maintain a lavish lifestyle into their retired years may want to save more.
Regardless, if you’re just starting to save for retirement in your 30s, putting aside even a small amount is helpful.
Savers can aspire to setting aside 15% of their annual gross income towards retirement by starting small and increasing that percentage by 1% each year until they’ve reached 15%.
For instance, 5% of one’s annual gross income is a more manageable goal and if one consistently increases that percentage by 1% each year, they can reach 15% in 10 years.
Building up savings for retirement is a long-term investment. Small, consistent contributions can still make a significant difference towards hitting a retirement goal.
Maximize the Potential of a 401(k) Account
A 401(k) is a retirement account that is sponsored through the individual’s employer. By using the account to its full capacity, it can result in a sizeable nest egg to be used during retirement.
There are limits to how much one can contribute to their 401(k) which is determined by the Internal Revenue Service (IRS). Currently, annual 401(k) contributions are capped at $19,500.
If possible, those in their 30s should try to meet the maximum annual contribution limit each year as determined by the IRS.
Statistics show most Americans in their 30s contribute approximately 8.3% of their yearly income towards retirement.
Depending on your yearly salary, this may fall short of the maximum 401(k) contribution limit.
However, those not yet ready — or unable, to contribute up to the current maximum limit can start by contributing just 8.3% of their annual salary.
This amount can then be increased each year until the maximum limit is reached.
It’s also important to know whether the employer matches employee contributions and if so, to what extent.
For those with an employer who matches, the IRS elevates the 401(k)-contribution limit to a total of $58,000 or the equivalent of your salary if it’s less than $58,000.
The amount one contributes to their 401(k) should also take into consideration how much their employer is willing to match.
Taking advantage of employer matching allows the individual to double the contributions made into their retirement account.
Open an Individual Retirement Account
With the IRS currently capping the annual 401(k) contributions at $19,500 per year for anyone who hasn’t reached their 50s, those saving for retirement in their 30s should open an individual retirement account (IRA) if they want to contribute more.
An IRA can be opened by anyone as it’s not employer-sponsored like a 401(k). According to the IRS, those with either a traditional or Roth IRA can’t contribute over $6,000 per year.
As with a 401(k), it’s in a saver’s best interest to meet the maximum contribution limit of their IRA each year.
Keep a Well-Balanced Financial Portfolio
With retirement age still decades away, those in their 30s are in a great position to handle the volatility of the stock market.
Individuals can invest in stocks and other financial products through their retirement accounts.
What one chooses to invest in depends on their personal, financial goals and age. At 30, one can still generally afford to risk more than someone who is closer to retirement age — within reason.
When it comes to adjusting one’s assets, an adults in their 30s can keep a portfolio of higher risk equities like individual stocks and still see a rate of return so long as it’s balanced with a few lower-risk investments like exchange-traded funds.
Build an Emergency Fund
Saving for retirement is important, but equally necessary during adulthood is accounting for the unexpected. It’s never a good idea to treat a retirement account as an emergency fund.
Doing so can put savers in a financially precarious position, as a single unforeseen circumstance can quickly drain what can take years to build back up.
Additionally, account holders are subject to financial penalties for withdrawing money from their retirement account six months before their 60th birthday.
Those in their 30s should build an emergency fund by opening a high-yield savings account, as it earns interest while active, and maintaining at least six months-worth of savings in it.
Opening a high-yield savings account with a credit union may be preferable as such institutions typically offer more competitive interest rates than traditional banks.
HRCCU, for instance, currently offers members an interest rate of 0.05%.
Having an emergency fund allows savers to maintain their current lifestyle, preserve their financial health, and protect their retirement savings.
Save for Your Future with HRCCU
Retirement, while perhaps a long way off, is an important part of maintaining good financial health. Taking time to build savings now alleviates worry later.
With HRCCU, members always come first. Whether it’s saving for retirement or building an emergency fund, our representatives are dedicated to helping members reach their financial goals.
To learn more about how HRCCU can help you attain financial stability for the future, contact us today. Our financial experts will be happy to answer any questions you might have.
