Money Talks, So Should You

Q&A: How much should I be saving for retirement in my 20s?

Mitch Marsden
by Mitch Marsden , NAPFA

In the financial planning industry, a researcher named Wade Pfau has completed some excellent research on how much individuals of all ages should be saving to sustain the retirement years. His work may be thought of as leading to some general rules of thumb that you may find helpful for savings amounts. 

Keep in mind that your personal answer to this question depends on a variety of factors including what you want to do in retirement, when you want to retire, what lifestyle you want to have now, how much income you make and how you expect it to grow over time, your and your family’s health needs both now and in the future, etc. It is best to really sit down and explore those questions first. A financial advisor and/or some online financial calculators and exercises will then be able to help you dial back to a personal savings goal.

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That said, the current research by Wade Pfau suggests appropriate savings rates somewhere in the 10-20 percent of gross income range for most young people. So if you make $45,000 a year, do your best to save at least $4,500, but target $9,000. The earlier you want to retire the more you’ll need to save. Similarly, the higher standard of living you want in retirement, the more you’ll need to save.

Retirement savings is most easily accomplished when it is automatic and requires no ongoing effort on your part. You can do this by participating in your 401(k) at work if your employer offers one, or you can work with your bank to set up automatic monthly savings/investment transfers just like you might put your cell phone on an automatic monthly debit from the account.

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If your employer does not offer a 401(k), IRAs and Roth IRAs are great places to start your retirement savings after you’ve established an emergency fund. You can open these at a brokerage house like Fidelity or TD Ameritrade, a mutual fund company like Vanguard, or other financial institutions like banks and credit unions. Just be sure to do some research and get some help from a financial advisor if you are unfamiliar with the kinds of investments you can buy in these accounts.

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Mitch Marsden is a member of the National Association of Personal Financial Advisors (NAPFA), a fee-only professional association and a Dimespring knowledge partner.