How young workers should prioritize retirement

Published: July 03, 2018
How young workers should prioritize retirement

The way things work in much of the developed world, including the U.S., most young adults struggle to plan very far in advance. Forget your friend's birthday next month - too many people in their 20s and 30s are already struggling enough to set medium-term goals related to their professional and personal lives. And that's to say nothing of retirement, perhaps the most distant challenge of them all. For most adults who have begun their careers in just the last few years, it's safe to plan on at least three decades passing before retirement turns into a reality. But success at this very long-term objective requires planning in the here and now in the form of saving.

Few topics are more uncertain than how to save for retirement. How much should someone save each year, or each month? How can you set those savings milestones as your income and spending changes over time? How is anyone supposed to save for retirement when even saving enough to pay off debt and other expenses seems hard enough? There is hardly a simple answer to any of these questions that applies to everyone. If you have the resources at your disposal to save even a little bit, though, many financial experts suggest making the most of it.

One of the best ways to save for retirement is with a tax-advantaged retirement savings account. These may take the form of a 401(k) or 403(b) offered through your employer, or an IRA available through most major banks. These funds require some commitment - for example, funds need to be deducted from your paychecks and can't be withdrawn until retirement age to see the greatest benefit. In return, it's possible to capture some impressive savings that will prove useful in retirement, to say the least.

In these self-directed retirement funds, workers have the option to set exactly how much of their pre-tax income, per paycheck, should be deposited into the savings account. Since it can be confusing to know exactly how much, it may be easy to make the mistake of simply ignoring these funds altogether. A better solution is to understand not only what you can afford to contribute, but how that money will grow over time.

How much workers have saved up

According to the U.S. Census Bureau, around 14 percent of eligible employers in the U.S. are enrolled in 401(k) plans that allow their employees to save up for the future. Of these, the Bureau found that only one-third of eligible employees were actually contributing to their workplace retirement plan. Everyone has their own financial challenges and aspirations to work within, so it's not as if the 401(k) is the retirement savings panacea that we all need. However, if your employer is one of the many that offers 401(k) plans with a matching contribution incentive, it would be unwise to pass up the opportunity. When employers match 401(k) contributions, they essentially provide employees with a bonus (up to a certain amount) toward their retirement funds.

To find the right balance between short-term cash needs and long-term savings goals, start by contributing the minimum amount to your workplace retirement plan required to receive a matching contribution. But even if matching isn't an option, financial experts still advise contributing to your workplace plan or considering an IRA. That's because by the age of 35, financial advisors who spoke to MarketWatch said a person's retirement account balance should be about equal to their annual salary. Again, this is only a broad target for someone to consider, and it isn't right for every situation. Still, it can be a straightforward goal for young adults to strive toward.

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