While this article is specifically for those around 30 years old and have nothing save for their retirement, many of the principles apply to those much older or younger. Financial principles apply to everyone.
According to this article in CNBC.com last fall, most older Millennials have less than $1,000 saved for themselves.
How much should the average person be savings from their annual income towards their (and perhaps their non-working spouse’s) retirement? I recommend 20%. I always say, “Save early, save often.” Your future self will thank you.
How do you balance saving for retirement and for short term goals simultaneously? The short answer is you don’t. You need to save for both your eventual retirement. Retirement is sometimes referred to financial independence. And saving for this goal is primary. You should save while you are able. At some point you may not be able to work and save. So, always live on less than you earn. This will help you accomplish two goals at the same time.
First, it will automatically reduce your standard of living or your lifestyle expenses. Because you save more, you spend less. You will need less than what you earn. Secondly, you build your nest egg for your future self more quickly. It takes time, but it will take less time when you start early or save a larger percentage.
An old Proverb, “Go to the ant, you sluggard; observe its ways and be wise! It has no commander, overseer, or ruler, yet it prepares its food in the summer; it gathers at the harvest what it will eat.” The ant gathers while it is able, storing up in the summer of its life for its life’s winter. When the winter of your life comes around, you’ll need to draw on what you’ve stored during your summer.
So how do you save for both retirement and near or short term goals? If you have nothing in your emergency fund start saving 10%, or half of your retirement saving. Save 10% to retirement account and 10% to an emergency fund. I call a typical “emergency fund” a “MatterFund” and it includes both emergency and opportunity. I find it easier to save for something positive rather than an unknown emergency. Saving for an unknown and still future opportunity can be more energizing. Obviously you should save to a non-retirement account. And, this should be much more conservatively invested if not in an actual savings account.
Stop saving when you’ve reached your desired MatterFund amount. Then kick up your retirement savings back to 20%.
Short term goals? 10%. To start, Saving for a future opportunity is easier. Because something positive will happen when you have money saved. If you use from this fund, then it becomes the priority again until you’ve reached your goal. Invest more conservatively for nearer term goals; cars with cash, vacations with cash, gifts, first or second home down payment, any other opportunity.
- How do you prioritize saving to your retirement fund? That depends on what options you have. Most have access to a 401k account and some employers match your savings.
- So, first save to your 401k if matched.
- If you aren’t matched, save to a Roth if allowed or a traditional IRA. You can invest in most any investment in a Roth or traditional IRA. Invest up to the annual maximum allowed.
- Then, save more to your 401k if you aren’t yet at 20% savings. Consider your spouse’s options.
- If you have no 401k option and are self-employed, consider saving to another type of retirement account; SEP, SIMPLE, etc…
- If you are a high earner and 20% exceeds your IRA and 401k max, then save to a taxable account; individual or joint brokerage where you can invest in anything. This may increase the size of your MatterFund and your allocation may need to reassessed. Be mindful of changes in your MatterFund. There are tax consequences with changes.
If you haven’t yet started saving, how do you jumpstart yourself? Get to it–now. Your future self will thank you. Become content with what you have and start saving for your future. None of my clients believe they saved too much for their future self.
As I mentioned previously, the more you save now, the less you’ll need now and the sooner you can become financially independent. My financially independent clients are happy with the independence. Many still work, but only because they choose to.
Once you’ve saved enough for your future self or see than you are well on your way, you can begin giving away your excess earnings. My generous clients are my happier clients. I also say, “Give early, give often.”
Be well, Dan