Savings by Age: How Much Do You Need?

We all know saving for retirement takes long-term thinking and planning, and the sooner you save, the better. Coming up with a strategy that will give you financial security later in life can be overwhelming to think about, especially when so many of us have financial obligations like student loans or a mortgage. 

Should you focus on saving a specific dollar amount? Should you consider obtaining certain assets? What about putting money in stocks? And is any of this tax-deductible or tax-free, or will you have to pay taxes upon payout? One way to simplify it is to know how much you should save at each age. 

How Do I Start Saving?

Like any long-term goal, a great way to start saving is to break it into small steps. Factors like lifestyle, financial goals, and the age at which you plan to retire will affect your approach to saving. But there are some general guidelines to follow. 

Some experts say saving 15% of one’s after-tax income (which includes tax-deferred employer contributions) each year beginning at age 25 is appropriate for most people. For many, this will suffice. However, when you factor in living costs, major life events like marriage, children, or buying a home, it’s hard to gauge if 15% is enough.

When you save according to the stage you’re at in life, it takes the guesswork out of planning for the future and makes it easier to keep track of your income contribution to your savings account. Generally speaking, a healthy way to save by age looks something like this:

  • Age 35: Most financial experts recommend saving your current yearly salary to 1.5 times your yearly salary. If you make $65,000, you should have at least that much tucked away by now for retirement, and even better if you’ve saved closer to $90,000. 

  • Age 40: It’s suggested you have 2.5-3 times your annual salary stashed away.

  • Age 50: You should have 4-6 times your annual salary saved.

  • Age 60: You should have saved 6-8 times your annual salary by this age.

  • Age 67: This is the age when you can collect 100% of your social security benefits – if you’re entitled to them. At this point, you want 8-10 times your annual salary saved for the future.

But where will you be keeping these savings? When saving for retirement or even for purchasing life insurance policies, you have some options of where to put your money.

What Kind of Savings Account Should I Use for Retirement?

Where you keep your retirement savings will largely depend on whether or not your employer has a company-wide retirement plan. The most common type of company investment plan is a 401(k). When you contribute to a 401(k), money is taken directly from your paycheck into the account before it’s taxed. However, you will be required to pay income taxes on the withdrawals made from the account, and you can begin withdrawing at age 59 without penalty.  

Other investment accounts include traditional and Roth IRAs. Similar to a 401(k), the money in a traditional IRA is taxed upon withdrawal. The Roth IRA, however, is funded with post-taxed dollars and, therefore, you will not be taxed when you go to use this money in retirement. There are specific 401(k) and IRA accounts for freelancers and small businesses, so we suggest reaching out to a financial advisor or tax advisor if you are looking to start saving in one of these accounts. 

Pension Plans vs. 401(k) Accounts

If you work in the public sector – police, teachers, firefighters – it is likely you have access to a pension as your employer retirement plan. Pensions differ from 401(k) accounts in that pensions are considered a benefit and are contributed by the employer where the employer guarantees a specific retirement payout. The employee funds their 401(k), and the employer has the option to contribute. 

However, both plans are similar in that the primary beneficiaries must be the spouse of the policyholder. Your spouse can sign away their right to benefits if you want someone else to be your primary beneficiary. The primary beneficiary receives the death benefit, which is not taxable income.

How Do I Make Sure I’m Saving Money?

Having a plan for your money in the long term is not helpful if you aren’t taking action on your plan for your money in your everyday life. Part of becoming financially secure and reaching your savings goals is learning to budget. As you get older or take on more responsibilities, living by a budget becomes more necessary. Understanding your relationship with money and your money triggers is the first step in helping you make a budget. 

Learning to budget can be challenging at first, but over time it becomes easier. The key is to live below your means. The 50/30/20 rule tells you how to allocate your income for living expenses and saving. Under the 50/30/20 rule, you’d break up your costs and savings into the following percentages:

  • 50% of your income: Half of all your take-home income should be for food, rent, utilities, student debt, and any other out-of-pocket expenses like medical bills.  

  • 30% of your income: A third of your income should be reserved for entertainment, vacations, shopping, and other discretionary spending.

  • 20% of your income: Finally, use the remaining 20% to save for retirement, create an emergency fund, and other long-term financial goals.

With the advent of smartphones, we now have numerous apps, social media groups, and learning tools to help us create and stick to a budget. Finding a system you can maintain consistently is the key to making a savings plan that works for you.

What Else Should I Be Saving For?

Effective financial preparation starts with saving for emergencies and big life expenses like car maintenance or supplementing income after a potential job loss. Having up to 6 months of expenses saved in an easily accessible account is a general rule that has helped many people overcome stressful times. 

Whatever portion of your income you can save, starting is the first step. Here are just a few of the short- and long-term financial goals and life events you can start saving for: 

  • Life Insurance Coverage Premium - Universal Life Insurance 

  • Medicare and Disability

  • Long-term Care

  • Personal expense, like marriage

  • Lapse in Insurance

Start Saving With Outset Financial

If you’re interested in learning about savings options for retirement, Outset Financial has many resources and tips to help you on your way to financial peace of mind. There’s a lot of information out there, and we’re here to help you make sense of it. Take our Financial Literacy quiz to see where you’re lacking in financial knowledge. Whatever your needs or situation – whether it's getting a tax benefit, determining a policy's cash value before surrender, selling off an asset for tax gain, or paying off the IRS – we’re sure we can help you reach your financial goals. 

Sources:

Savings by Age: How Much to Save at 30, 40, 50, 60, 67

401(k) vs. Pension Plan: What's the Difference?