If you are in your 20s, 30s, and 40s, saving for retirement is different than it was for your parents. While the goal is the same -- preserving lifestyle -- how you’ll do that will be affected by the fact that you may change careers the way workers once changed employers, making it important to think about retirement planning in the context of career planning.
Research shows that compared to baby boomers, generations X Y, and Z (also known as Millennials) are motivated less by money and more by a desire for work-life balance and finding meaning in their work. If you fall into one of these groups, it’s likely you will try out multiple professional identities in your quest for professional fulfillment.
You probably can’t anticipate the steady career progression that culminates in a pre-retirement stretch of five to 10 years of peak earnings. You could have as many earnings peaks as you do careers -- and as many earning plateaus and valleys. So even though you may think about retirement differently -- after all, you will likely “retire” more than once -- you need to practice the same disciplined approach to saving that we advocate for those who follow more traditional career paths. That means saving a minimum of 15% of your income, no matter what, and possibly more.
Here’s what you need to consider in making sure your career and retirement -savings strategies are in sync.
Recognize that you are Responsible for your Retirement
You are responsible for your own retirement savings in a way that previous generations were not. And it’s not only because career shifting will limit the longevity you have with employers. The truth is, longevity with a company just doesn’t matter as much, because few companies still offer defined benefit plans.
The burden for ensuring a comfortable retirement has transferred from employers to employees.
This means that to maintain your lifestyle, the largest source of income will need to come from your own personal savings.
So, just as you can take charge of your career(s), you can and must take charge of saving for retirement. It’s not up to the government or your employer(s). It’s up to you. This should be empowering, not frightening.
Be Consistent. Don’t “Market Time” Saving for Retirement
The inherent uncertainty that accompanies career shifting speaks to the need for consistency -- steady savings of 15% or more. One of the most common mistakes is thinking “Down the road I will be making more money and I can ramp up my savings from 5% to 15% then.”
Even though mathematically you may be right in thinking that saving 15% of a small salary is less significant when you compare it to saving 15% of a large salary, the danger is you can always convince yourself that there will be a better, easier time to save. The more money you save now and the more consistent you are with your savings, the more options you will have in the future, and the better prepared you will be for however those options play out.
Chances are good that you can’t be sure at any given time whether you are at a high point or a low point in your earning power, so you need to commit to saving 15% for retirement, no matter what. Otherwise, you will be making all sorts of guesses about the future -- and hoping you get them all correct. The odds of making all the right guesses are pretty low.
As Your Income Expands, So Will Budget Demands
Another danger of the “I’ll save more when I earn more” mentality is it doesn’t take into account that life gets more expensive. If you’re just out of school your income probably isn’t that large, but assuming you are not unduly burdened with excessive debt, your expenses aren’t that large either.
As you get older and life becomes more complex with additional responsibilities -- advanced education, a house, a spouse, children, planning for their education, taking care of parents -- your expenses will grow, too, taking a proportionately bigger bite out of your (presumably) bigger income. You won’t be living a $25,000 a year lifestyle on a $75,000 income -- and nor should you.
If You Have Specific Career Plans, Save Accordingly
Some people have well-planned timetables for career switches, and know what those changes will look like. “I’ll leave banking at 40 and go into teaching.” “By 45, I am determined to open my own business.” “After 50, I’ll work for myself.” If you have a plan that suggests you will be leaving a higher-paying career for a lower-paying one or one with more uncertainty around your income, you probably want to save at least 20% of your income, rather than the standard 15%. If it’s going to be a really big shift in income, you might want to save even more than 20%.
If you eventually downshift to a lower salary and lifestyle, it will take less money to maintain that lower lifestyle in retirement. So if you saved consistently at higher rate at the higher salary, you would have some flexibility in saving at a lower rate at the lower salary, making both the career transition and the transition to retirement easier.
People often think that financial planners are all about encouraging savings at the expense of living the comfortable lifestyle that you’ve earned. Certainly we advocate that people not live beyond their means, but people don’t need to live way below them, either. Don’t live like you are earning “just out of school money” when you are in your 30s and 40s.
If you’ve been on track with 15% and you want to goose it to 20% to give yourself some flexibility later on, fantastic! But you don’t need to go to 40%. That kind of deprivation can create resentment about the whole idea of saving and create pent-up demand that can blow up a careful savings plan.
Saving is always a trade off. The more you save now, the more you are giving up -- for now. But the more flexibility you will have later. So don’t go to extremes, one way or another.
You may have great variances in your income over the course of your working life, particularly if you switch careers. Much of it will likely be unpredictable, so your best safeguard against that is a commitment to a consistent retirement savings plan of 15% of your income. If you do know you’re in a high-earning stage, save even more. Planning for peaks and valleys allows you to view them as part of the adventure of career exploration and personal fulfillment, rather than financial events that imperil your future.
Stuart Ritter, a financial planner and vice president of T. Rowe Price Investment Services, has been with the firm since 1998. Stuart currently helps design, build, and implement guidance and advice services for our investors. A frequent contributor to T. Rowe Price publications, he also has appeared on ABC News, Fox Business News, and National Public Radio and has been quoted by The Wall Street Journal, Money magazine, and various other national news organizations.
In addition to teaching a personal finance course in Johns Hopkins University's Entrepreneurship and Management Program, Stuart has taught at Howard Community College and the University of Maryland's Robert H. Smith School of Business. He holds a B.S. in electrical engineering from the University of Maryland, College Park and an M.A. in political science from American University.