How Much Money Should I Have Saved By 25?
While you may only be in your mid-20s, stashing money away for retirement should start as soon as possible. According to the National Center for Education Statistics, the median annual earnings for workers at the age of 25 are slightly above $40,000. Additionally, Fidelity Investments — financial planning experts — say that you should have a total of one year’s annual salary in savings toward your retirement by the age of 30. This means that by age 25, you are only five years away to meeting Fidelity’s recommendation of having $40,000 saved up for retirement.
This can be a sobering thought for someone who is 25. At this point in your life, you may not have even found a job worth considering a career in, and you have credit card and student debt to pay off. To someone in their mid-20s, saving for retirement may not have even crossed their mind — they may just be trying to stay afloat with monthly expenses and student debt hanging over their heads. It may help to know that there are steps you can take (even with very little money) to start setting aside money for retirement at the early age of 25.
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How Much Should I Have in Savings?
How much a 25-year-old should have in savings is a tricky question. Many factors go into this number, but it is advised that you have 3 to 6 months’ worth of living expenses saved up for emergency savings. It should be noted that your emergency savings are not part of your retirement savings. However, it may be difficult for people at this age to even save for an emergency, let alone retirement. It may ease your mind to know that a 25-year-old can expect to be on their way of having 25 to 50% of the above $40,000 saved away for retirement.
How Much Do I Need to Retire?
It is a common consensus that individuals will need about $1 million saved for retirement. If $1 million seems unachievable, keep in mind that this includes a lifetime of savings, company contribution matches to your 401(k), and retirement accounts. It is estimated that once you stop working, an average retiree will have $30,000-$45,000 of yearly living expenses.
These retirement figures are subjective, but represent excellent ballpark amounts to consider. For instance, if you live conservatively, you may not need as much to retire. To find out how much you need to save, or if you are saving enough for retirement, AARP provides a retirement calculator with which you can calculate whether you are prepared, or when you will be prepared, to retire.
Saving for Retirement When You Are 25
Saving for retirement is probably not at the top of your list of financial responsibilities as a 25-year-old. Although, many accounts offer compound interest, and if you can put away even the smallest amount of money in a high-yield savings account (sooner rather than later), then you can accrue much more money on interest by having it in these accounts for long periods of time. It is wise that you start setting aside money, no matter how small, as soon as possible for your retirement.
Where Do I Start?
There are several ways a 25-year-old can begin freeing up money to set aside for their retirement:
Create A Budget: the first step in saving any money is to understand where your money is going. Once you know what spending you can cut (smoking, clothes you don’t need, etc.), you can funnel this money toward your retirement. Additionally, track your spending, and understand how much you spend on rent, groceries, utilities, loan payments, insurance, and other fixed expenses can help you understand your needs versus your wants. With a budget, you can watch your spending, and understand when you need to stay in and cook at home rather than go out and pay for food.
Ask for A Raise: this may be an uncomfortable conversation, but if you understand how to ask for a raise, you may be better prepared to negotiate a higher wage for yourself. It never hurts to ask, and the extra money can help your budget, and/or give you additional income to tuck away for retirement.
Start Paying Into A 401(k): your employer may offer a 401(k) in which they match your contributions up to 6%, and this may be the most straightforward way to pay into your retirement. Every paycheck, a portion of your money goes toward your retirement, with the addition of your employer matching what you contribute. Essentially, this is free money, and should strongly be considered for retirement. Additionally, you may want to understand traditional IRAs and Roth IRAs as an investment toward your retirement as well.
Invest in A High Yield Savings Account: opening a high-yield savings account is another way you can earn compounded interest on your money. The longer your money sits in this account, the more interest it will accrue and the more money you will make — which will then accrue more interest, and so on.
Once you have started saving for your retirement, you are setting yourself up to live comfortably after retiring and not being a burden to your children. Starting your retirement savings as early as possible is strongly recommended, and at the age of 25, you are still getting a great jump on retirement. Although the numbers suggest you may be behind, it never hurts to start now.
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Desmond Rhodes is a writer out of the Northwest. A philosopher, gamer, and enjoys his Hunter S. Thompson.
This post was updated September 9, 2019. It was originally published September 15, 2019.