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How Young Professionals Can Start Building Toward Retirement
According to a study by the Teachers Insurance and Annuity Association of America, only 20% of Generation Z adults are saving for retirement. Why is that number so low? There are many reasons, such as:
- Rising living costs
- Differing priorities
- Lack of reliable financial advice
Building a strong financial foundation is crucial for living the life you want and achieving your goals. However, knowing where to start can be a daunting task, especially in an era where information is plentiful and somewhat overwhelming.
You can start building towards retirement in a way that seems almost effortless by getting a handle on the fundamentals of budgeting and savings. Here’s what you can do now as you develop your career.
Build a Budget With Saving in Mind
As a young professional, it can feel like there are many opportunities ahead of you. A steady income is one of the first steps towards independence.
The first step is to set a budget that allows for savings. A good starting point is following the “50-30-20 rule.” To start using this rule now, take your expected monthly income and break it down into buckets:
- 50 percent goes to living expenses (rent, groceries, transportation, bills)
- 30 percent goes toward discretionary items (leisurely pursuits, wants, etc.)
- 20 percent goes to long-term savings goals (emergencies, down payments, retirement)
These percentages are negotiable to an extent. For example, more than half of your income may be required to cover additional living expenses. Alternatively, you may have a lifestyle where setting aside less money for luxuries is more sensible.
The important thing is having a framework in place so you know where your money is going, and the money has a purpose. If you prefer, you can separate the money into individual bank accounts (think of “buckets” or “envelopes” to mirror a recent social media trend). Setting simple boundaries like these will give you a better idea of the money you can use now and what’s set aside for the future.
Notice we recommended a category for “long-term” goals. Setting aside this type of money is crucial if you’re planning for retirement. We’ll go over that now.
Take Advantage of Time as a Young Professional
Are you familiar with compound interest? It’s a handy savings principle where money in an interest-bearing account accumulates value over time. As the account gains interest, it will also factor in the interest accrued previously. It generates a snowball effect that is especially useful in retirement planning.
Investors use this strategy when saving for long-term goals, such as retirement or the down payment on a house. The key factor here is time. Compound interest performs best when the account isn’t constantly tapped for funds and is left to “simmer,” in a sense.
You can start building this power for retirement in several ways. You can open an individual brokerage account, IRA, or Roth IRA and contribute your retirement savings to it. Another option is to take advantage of your employer’s retirement plan, if one is offered.
Investing can be intimidating, especially since all investments have a risk of losing value. However, this is where you can use time to your advantage. As a young professional, there are two benefits to starting your savings journey early:
- You have time to absorb changes. Investments are susceptible to market forces, which change over time. The longer you save for retirement, the more likely you will be able to adapt to these fluctuations.
- Compound interest has time to cook. One of the key features of compounding is that it considers both the principal and the interest accumulated over previous periods. That means the longer it cooks, the more it earns.
If all of this still seems a little daunting, don’t worry. You aren’t alone. The key takeaway here is to have your retirement goals in mind and to follow through on your savings plans.
Arranging a meeting with a financial professional can also help solidify your ideas into actionable plans. A qualified financial professional has the knowledge and experience to help discuss money-minded topics and can even help guide your retirement journey.
Save for the Future Seamlessly
Now that you have an idea of what the future holds and how to get started, it’s time to build like-minded habits.
When you have your accounts ready and labeled, make saving an automated and virtually hands-free task. Set up automatic transfers between your accounts to ensure you never miss a savings goal. You can set up these automatic transfers with your financial institution.
If your employer has direct deposit, you can also request that your paycheck be split and deposited into different accounts. Contact your employer for more details.
Using an offshoot of the 50-30-20 rule, here’s an example of splitting your paycheck:
- 50 percent of your check goes to your checking account to pay for essentials
- 30 percent goes to a separate savings account for vacations or other fun stuff
- 10 percent goes to an account for emergencies and incidentals
- 10 percent goes to an account for retirement or long-term financial goals
Having a plan for where your money goes will empower you to save and spend purposefully. Also, it could reduce impulse buys that would otherwise drain your savings.
And even if something like the down payment on a house or a new car seems far off, don’t feel discouraged. These are “long-term” financial goals, after all. While it may not be feasible to obtain these things immediately, knowing that you are actively saving for them should provide encouragement.
When you have a plan and stick to it, reaching your financial goals will feel natural. All it takes is getting started. As the saying goes, the best time to do something was yesterday. The second-best time is now.
First Florida helps you place the stepping stones towards a bright financial future. Explore our It’s a Money Thing library of topics for more pointers on saving. You can also open purpose-driven savings accounts to keep your finances organized and on track.