I recently did a radio show here in Seattle on Trying Not To Die Broke: Saving For Retirement Before You Hit 40. I am uniquely suited to discuss retirement savings for people under 40, since the majority of my clients are 40-ish and under. Most older people like to work with a planner who is a bit more traditional than I am—a suit and tie instead of yoga pants and a hoodie.
Although the segment was mostly questions and answers, I thought I would share some key points from the conversation.
Retirement Savings Trends
Here four trends that I see consistently as I work with individuals on retirement planning:
- No confidence in social security. Did you know that the benefit most 30-40 year olds see on their social security statements are about 18% less than what the baby boomers are getting? Most of my clients don’t want to factor in social security at all into their retirement savings, but a reduction in benefits is more likely.
- Conservative growth. People are FINALLY gaining confidence in the stock market again, but when I do retirement savings analyses, I typically plan for a rate of return around 7%–and most people are comfortable with that (if they get more over the next 25-30 years, so much the better).
- Onus on the individual to fund retirement. With social security benefits reduced, pensions going away and even employer 401k matching becoming less common, individuals should more and more of the complete responsibility for their retirement savings.
- Accept their role. What is really refreshing about my work is that NO ONE IS WHINING. I find this amazing. The people I work with are stepping up, acknowledging their role and no wasting time over pointing fingers or regrets. I find this inspiring.
The New Retirement
The key to feeling confident about your retirement savings is to quit comparing yourself to everyone else. Here are three steps that are especially important:
Realize you don’t need a baby boomer retirement. Baby Boomers worked hard and deferred all relaxation and enjoyment until they stopped working completely. We don’t think this way anymore. Most of my clients are okay working 5 years longer if they get to have fun along the way, with travel and a more balanced life.
Don’t focus on what you don’t have, focus on what’s possible. 25-30 years in the future really is a long timeframe, so there is no point in freaking out if you haven’t started retirement savings yet. Get the clarity you need to know what to do to get started, and don’t beat yourself up too much.
Future planning makes today more relevant. When people gain clarity on what they need to do in order to be on track for their personal retirement savings, it tends to motivate them to cut back in the present, and start to take a harder look at how they spend their money.
Current Economic Trends
The economy has been changing how my clients are looking at the financial picture. They are:
- Making employers part of the retirement savings equation. It used to be, people just looked at their salary and the quality of work they were offered as a way to compare one job offer with another. Now, choosing to work for the employer who offers 401k matches and other benefits have become a way to make a job offer more attractive to sought-after employees, so they can get an edge in their retirement savings.
- Backing away from more expensive homes. Seattle real estate growth rates are above the national average, yet I notice clients preparing to buy are not planning on home equity increasing through growth. They are conservative in deciding purchase prices and how much mortgage debt they want to take on, in order to keep cash flow available for savings.
- Engaging in less flashy lifestyles. When I first moved to Seattle prior to the economic downturn, everyone seemed to be involved in the foodie culture and expensive hobbies. Now, I notice more and more of my clients are buying cheaper cars and fewer expensive dinners. It appears that people are prioritizing experiences like travel over “stuff” when they engage in spending.
How To Save For Retirement
When you’re under 40 years old, there are a lot of priorities more immediate than retirement savings. Here are some tips on how to save for retirement even with having children, moving into your first (or larger) home and paying off student loans:
Build the saving habit. I always say that wealth is dictated by paying attention to savings, not the stock market. Focus on what you CAN do instead of what you can’t. Saving something—even as little as $50 monthly—is better than nothing. Make it automatic and increase the amount as you are able.
Always get the free money. If your employer does provide matching funds, save into your 401k so you get 100% of the allowable match. If your employer offers company stock at a reduced price (usually through the employer stock purchase plan or ESPP), take advantage of it.
Know that funding one IRA annually probably won’t get you there. If you don’t have an employer plan available for retirement savings, you can use an IRA or Roth IRA, but the maximum contribution for 2013 is $5,500 for people under 50 years old. You’ll probably need to save more like in the $15,000 to $20,000 range annually.
Consider a side hustle to boost your savings. I have many clients who supplement their income through a side hustle: selling photos or crafts on Etsy, working as a virtual assistant, walking dogs and designing websites. You never know when your passion or hobby could become financially lucrative!
Retirement savings doesn’t need to be scary or intimidating to people who are under 40 years old. The key is to do what you can and be creative in finding ways to save a few more dollars as you go. The most important step is to simply begin.
Actions This Week
- Resolve To Do Something. You might increase your current savings by $50, or simply open a new account. Find one small step that you can take to help you focus on retirement savings.
- Stay Positive. I come across a lot of anxiety when people start thinking—and worrying—about the future. YOU control the future by taking action. It’s possible you will need to adapt as you go, but isn’t that true of everything you decide is worth doing?
- Get Clarity. Some people start simply by saving. Other people need a road map to get motivated. Decide what information you need to take action, and then get it.
And in the comments, tell me…
What issue do you wrestle with when you think of retirement savings?
Thanks for being part of the Creative Money Community!
No spam. No games. Just timely, insanely useful content to help you grow your money.