Written by: Samantha Masey
Many young professionals are not aware that saving for retirement now will have a huge impact on their financial picture in the long run. This article offers three practical steps to get their financial life on track.
Three steps for savings towards retirement:
- Create a Budget
- Contribute to Employer Retirement Plans
- Manage Your Debt
Create a Budget
Creating a budget to understand your cash flow needs is an important step towards financial success. A budget will help you plan for financial goals and make sure that you are meeting your short-term needs. Include short-term goals like saving for a first home and long-term goals such as retiring early. This framework will help shape financial decisions in the near term and can have a huge impact on achieving your retirement goal. Below are some tips to help create your budget.
Tip #1: Track your spending
- Technology has made tracking your spending easier than ever with expense tracking apps, mobile banking, and other organizational tools.
Tip #2: Spend less than you earn
- This may seem like a no brainer, but it is the foundation of a successful budget.
Tip #3: Optimize your big budget items first
- Housing and transportation make up a large percentage of the typical budget.
Tip #4: Have an emergency fund
- A good rule of thumb is to set aside 3-6 months of expenses. This fund will help you pay for unexpected expenses and keep you from taking on unplanned debt.
Tip #5: Calculate how much you can save/invest
- Subtract what you spend from what you earn for how much you can save & invest. Specific retirement contribution recommendations will be discussed next.
Contribute Towards Retirement Accounts
As a young professional, you will most likely have access to a 401k or 403b plan through your employer. These retirement accounts are excellent investment vehicles. One of the best pieces of advice a financial advisor can give you is save early and save often. Starting now gives you the benefit of a long time horizon for your money to grow from compounding returns.
Tip #1: Start now
- The example below exhibits the concept that the earlier someone takes advantage of compound interest, the more time that money has to grow. Investor 1 started at age 25 and stopped investing after 10 years but still had a higher account value than Investor 2 who started saving at age 35 until he retired.
Tip #2: Contribute 10-15% of your salary
- The contribution limit for 2022 is $20,500 which increased $1,000 from 2021. For a young professional, this may seem outside of your ability to save and that is okay. The idea is that you want to save the best practice of 10-15% of your salary. As you make more money throughout your career, try to continue saving this percentage.
Tip #3: Take advantage of your employer contribution match
- At a minimum, you want to contribute enough to receive the full employer match. If you are following the best practice rule of 10-15%, you will almost always meet this criteria.
Tip #4: Select proper investment allocation towards growth
- We often see people in the wrong investment allocation for them. As a young professional, you want to be properly allocated towards growth which means having at least 80% of your investment holdings in equities. During times of volatility, this is advantageous for an accumulator because you are buying into equities when they are depressed and will experience growth when the market recovers.
Tip #5: Consider Roth contributions while you are in a lower tax bracket
- Check with your employer if your plan allows you to make Roth contributions to your 401k. You will likely go on to make a higher salary and as that naturally happens, your tax bracket will also increase. This presents an opportunity for you to make Roth contributions to your 401k or 403b plan while you are still in a lower tax bracket. The benefit of Roth instead of pre-tax contributions is that your contribution will initially be taxed, but all account growth thereafter will be tax-free. When you retire, you will be able to withdraw the Roth portion of your 401k tax-free. Pre-tax contributions are not taxed when initially contributed but will be taxed upon withdrawal.
Tip #6: Consider a brokerage account
- Do you have short-medium term goals like saving for a house? A brokerage account gives you more liquidity with your investment, meaning that you are allowed to access those funds without penalty. Early withdrawal from a 401k plan incurs a 10% penalty on top of what you will have to pay in taxes.
Manage Your Debt
It is not uncommon to have debt when starting your career. Whether it is student loans, credit card debt or car payments, you will want to have a plan for paying down these debts. The best course of action is paying down the debt with the highest interest rate first, but remember, not all debt is bad debt. It can sometimes be beneficial to keep your normal payments on low-interest debt instead of paying them off aggressively if this allows you to invest in your retirement accounts.
If you are a young professional seeking financial planning advice or have questions about saving for retirement, please feel free to contact our team for a discussion.
- The Power of Compounding Returns
- Good vs Bad Debt: Does Good Debt Exist?
- How Much Do I Need to Retire?
Bouchey Financial Group is a fee-only, fiduciary, financial advisory firm with locations in Saratoga Springs & Troy, NY.