By: Matthew Clayson, Financial Advisor at Commonwealth Financial Group

Retirement savings are not on most young adults’ list of top priorities.

In fact, according to one survey, only about 1 in 5 members of Generation Z (born after 1997) are saving for retirement. And that’s a missed opportunity for the other four.

That’s because the earlier you start on a retirement plan, the better off you are likely to be when it’s time to actually retire.

Despite your current expenses, it is not too early to consider retirement planning. And there are some steps you can take to start saving right away that don’t involve eating Ramen noodles every night.

Budget

With so many expenses stretching their budgets, many young people starting out may feel like they can’t afford to save for retirement. But a budget that prioritizes savings can help you take a closer look at your recurring and nonrecurring expenses each month to set aside a reasonable amount.

And the first step in prioritizing savings? Take a look at the retirement plans available to you.

Retirement plan types

401(k): Some retirement savings accounts offer good tax advantages and investment opportunities. In fact, many employers offer programs like 401(k)s that contribute to the plans on your behalf. This is a retirement plan that you can start investing in right away.

Contributing to a 401(k) account has three distinct advantages:

• You will receive an immediate tax break because your contributions come out of your paycheck before taxes are withheld.
• If your employer matches a portion of your contributions, you are essentially getting free money to invest. These plans commonly involve an employer matching between 50 percent to 100 percent of your contributions, up to a certain threshold.
• You also have the opportunity for tax-deferred growth for most of these plans. This means that you will not be required to pay taxes each year on capital gains, dividends, or other yield distributions. However, when you withdraw your money from the account, you will typically owe income taxes on the amount withdrawn, and if withdrawals are made before you are aged 59 ½, a 10 percent additional tax may apply.

IRA: A traditional IRA is a tax-deferred retirement savings account. This means that you only pay taxes when you take the money out at retirement. The advantage here is that you do not need to pay taxes on any of the dividends, compound interest payments or capital gains you earned over the years until you withdraw your money. However, any amount you withdraw before age 59 ½ will typically subject you to income taxes and a 10 percent additional tax.

You may also have heard about Roth IRAs. The difference between the two is that traditional IRA contributions are state and federal income tax deductible for every year you contribute, but you pay income taxes when you withdraw at retirement age.

Roth IRAs are not tax-deductible, but like traditional IRAs any growth is not taxed. Unlike traditional IRAs, however, your withdrawals at retirement age are not taxed.

You can learn more about IRAs here or you may opt to consult a financial professional to learn more about the benefits of a Roth IRA versus a traditional IRA for your own situation.

Investment portfolio: In addition to retirement plans, you may want to invest for long-range goals like buying a house or other major asset. This would mean setting up your own portfolio holding investments based on stocks, bonds, or other types of assets.

Remember, different investment vehicles come with different expenses and charges as well as risks.

That is why you may want to look at investments like index funds and mutual funds or even annuities with low expense ratios across a wide range of asset classes for diversification.

Retirement savings: How much?

There is no cookie-cutter answer. It depends on your goals, lifestyle, cost of living and various other factors. But one way to help is to use this retirement calculator to get a better idea of what you are up against with your retirement savings.

• 15 percent: One rule of thumb is to save 15 percent per year. According to a research paper from the Center for Retirement Research at Boston College, people who consistently saved 15 percent of their income per year were better positioned to meet their retirement planning goals.¹ For instance, if you saved that amount on a $50,000 salary for 35 years, you may have somewhere around $1.5 million saved.
• 8 times: Another rule is to save roughly 8 times your final salary. For instance, if your ending salary is $75,000, you may want to save around $600,000. This is an amount that may be within reach of your retirement savings plans.
• 80 percent: A third common rule is to replace at least 80 percent of your pre-retirement income, which is the average income over roughly the last 10 years leading up to retirement. You may want to use this retirement savings calculator to estimate how much pre-retirement income you will need to put aside. Seventy percent is an estimate, but the point is that retirement can be expensive. So that number may be a good place to start in order to maintain your standard of living.

Regardless of which savings target you choose, the important point for younger workers is to get a program in place early.

Retirement and financial priorities

Retirement saving is difficult when so many other financial issues seem to have priority. Student loan debt, life circumstances, and family obligations are just some of the financial factors you may contend with. Saving, let alone investing, may not seem feasible as you try to make ends meet.

But not saving early for retirement may put you at risk of having to retire later than you want or under less-than-ideal circumstances. That may not seem unreasonable, but with potential factors like health problems, getting laid off, or various other issues beyond your control, you may be forced out of the workforce before you have enough saved to retire ― at least not as comfortably as you intended.

This is particularly important because, according to the CDC, the average life span in the U.S. is approaching 80 years. That may leave you with 15, 25, or even 30 years of retirement.

While retirement is still decades away for younger workers and adults, it’s never too soon to consider it, especially if you plan on having children soon. It may also be time to consider other options that go along with retirement, like life insurance, long-term care insurance, annuities, or disability income insurance, to name a few.

So, while it is important to consider retirement, the suitability of saving varies from person to person. The tips mentioned above are just some ways to start saving. But that’s why some people opt to consult a financial professional to help assess their assets.

To be sure, this advice comes from an insurance provider. But it doesn’t change the general wisdom of considering the feasibility of saving for retirement in your 20s and 30s.

About the Author

Matthew Clayson is a Financial Advisor at Commonwealth Financial Group. He is a registered principal of, and offers investment advisory and financial planning services through, MML Investors Services, LLC, Member SIPC (www.sipc.org).