Saving for retirement in your 30s

This is part 2 in a five-part series on saving for retirement at any age. Check in next Tuesday for information on retirement savings in your 40s.

Our recent post on saving for retirement in your 20s examined the advantages of starting your retirement savings efforts as early as possible. But that doesn’t mean that it’s too late for you if you’re in your 30s and haven’t yet made a concerted effort to save for retirement.

Get that company match NOW

If your employer offers a company match and you are not taking advantage of that offer by contributing the maximum amount that they match annually, you are effectively turning down a raise – and a tax-deferred one at that!

• If they match dollar-for-dollar, you’re getting the equivalent of a 100% return on your investment right away. Few opportunities give you guaranteed growth of 100% right off the bat.
• And even if they “only” match half of your contributions – one of the most common company match offers is to match 50% of an employee’s contribution up to 6% of his/her salary – that’s still a 50% return.

If you’re already enrolled in your 401(k) but aren’t maxing out the company match, log in and increase your contribution to that amount today. And if you’re not enrolled at all, check your company intranet or talk to your HR benefits representative to learn how to sign up and start contributing.

You’re already contributing to a 401(k)

If you skipped the section above because you’re already contributing to your workplace 401(k) up to your company match amount, good for you! But don’t stop there…now is the time to step it up and increase those contributions as much as you can.

When you next get a raise, up your 401(k) contribution percentage. For example, if you get a 4% raise, you could increase your 401(k) contribution by 2% without feeling any “pain” in your wallet. You’ll see an uptick in your paycheck because you’re still getting a 2% increase there. It allows you to save more for the long term while still getting more take-home money now.

You’re not contributing to a 401(k) yet, and the thought scares you

Many people who aren’t currently contributing to their 401(k) are intimidated by the idea of having 6% or 10% taken out of their paychecks. But the “pain” that you feel in your wallet now is not that great if you are making pre-tax contributions. Let’s say, for example, that your gross salary is $52,000 a year, paid in 26 bi-weekly paychecks of $2000, and your company provides a 50% match up to 6% of your salary. Six percent of that $52,000 salary is $3,120 annually or $120 per paycheck. But if you started to contribute 6% of your salary into your 401(k) on a pre-tax basis to max out the matching, it would NOT mean that your take-home pay would go down by $120 per paycheck. Why? The 6% is taken out before taxes are withheld.

A $52,000 salary, assuming you didn’t have other significant income sources, would likely mean you are in the 25% tax bracket. If you didn’t contribute that $120, around 25% ($30) would be withheld for taxes before it got to your paycheck. So the actual bite out of your take home pay would only be around $90. That might still intimidate some of you, but keep in mind that the 50% company match means that the $90 reduction in your take-home pay gives you $180 in 401(k) contributions (your $120 plus $60 of matching funds). And with 20 or 30 years for it to grow and compound over time, that amount can make a HUGE difference in the lifestyle you can live in your retirement years. If you focus on that long-term picture, it could make it easier to find $90 to cut from your current spending.

How much should you save?

In 2012, the New York Times reported on new guidelines suggesting some broad milestones to keep in mind to help pursue a goal of adequate retirement savings. According to these guidelines, at 30, you should have saved at least one-half of your annual salary. By 35, you should have retirement savings that equal your annual salary. By 40, you should have double your annual salary saved in your retirement fund. These guidelines are really just ballpark figures, and everyone’s financial needs are unique. If you want to get a more exact picture of where you stand financially, and what you need to do to pursue a more secure retirement, you can meet with a personal financial planner to review your current assets and savings situation and get their expert evaluation and recommendations.