In your 20s? Here's how to start retirement saving now
According to a Fidelity study, on average Americans have saved only 78% of the amount they need for retirement. Personal finance educator and Made Whole author Tiffany Aliche joins Wealth! to discuss strategies for young people beginning to think about retirement and levers Americans can pull before maxing out a 401K.
Aliche doesn't always advise her clients to max out their 401K accounts: she signals that the $23,000 max for 2024 is an amount many Americans don't have, and suggests saving for health insurance or paying off high-interest debt instead. "The 401K is not the end all be all when it comes to retirement accounts with tax advantages," she adds.
If you are in your twenties, Aliche's advice is simple: "Start now." The more young people make, the more they should start to put aside, she says. Aliche also states that the younger years are the perfect time to ask for advice — for instance, talking to an advisor attached to an employer 401K plan.
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Editor's note: This article was written by Gabriel Roy
Video Transcript
BRAD SMITH: There's a lot of differing advice out there when it comes to saving up for retirement. And for young people, it can get really confusing really fast in some cases. According to a Fidelity study, on average, Americans have saved only 78% of the amount that they'll need in retirement. So how do you get started? Let's go to square one here. Joining me now is Tiffany Aliche, who is known as the budgetnista.
TIFFANY ALICHE: Yes.
BRAD SMITH: Well, we should also mention she's a personal finance educator and author. You see the book there on the screen. New book. "Made Whole, The Practical Guide to Reaching Your Financial Goals." Tiffany, great to have you here in studio with us.
TIFFANY ALICHE: Good to be here, Brad.
BRAD SMITH: Our friend Ross Mac actually--
TIFFANY ALICHE: That's my friend too, just so you know.
BRAD SMITH: Our collective friend, Ross Mac, advises against maxing out your 401(k), and you seem to agree to some extent here. So what are the levers that people can pull prior to maxing out that 401(k)?
TIFFANY ALICHE: Before thinking about maxing out your 401(k) because it might not be realistic, $23,000 is the max for 2024.
BRAD SMITH: OK.
TIFFANY ALICHE: So a lot of people don't have that. The average American is making less than $60,000 a year, right. So you want to ask yourself, one, do you have proper health insurance? Maybe you want to save for a down payment on a home. Maybe you have high credit card debt that you want to focus on. Do you have life insurance if you have a family? There are other things.
Plus the 401(k) is not the end all be all when it comes to retirement accounts with tax advantages. There's also a Roth IRA. Have you considered that? So consider those things before maxing out. But what you want to do Brad for sure is whatever your company matches, make sure you at least get that match. That's the free money that's owed to you.
BRAD SMITH: OK, get that match. And that's the second time that we've heard that in today's show. When you think about beginning retirement planning for some who are just entering into the full-time workforce in their 20s, that conversation starts then. So how can people that are even in their 20s start to begin their retirement plan?
TIFFANY ALICHE: Especially in your 20s because time is on your side. Isn't that how the song goes?
[LAUGHTER]
Right? So one you want to start now. It doesn't matter how small the amount, start now. And when your 20s, I want you to create the habit that the more you make, the more you start to set aside. So every time you get a raise, an increase to your income, you're going to set aside more.
In your 20s, it's also a good time to practice asking for advice. If you have a traditional 401K at your job, they almost always come with a financial advisor attached. Call them. Reach out to them. And leave your money alone. Don't touch it because if you allow it, compound interest is really going to set you up for retirement.
BRAD SMITH: What's the one thing that you wish you could tell your 20-year-old self about retirement if you could go back and do things differently?
TIFFANY ALICHE: Well, honestly, I would have told her that like, one, when I first started, I didn't realize I actually had to choose my account. That I had my money sitting in a money market account for longer than I knew. Because, you know, the money you say, yes, take out this much money a month for my check. I didn't know like past that, girl, you have to make a decision where it's going to go. So it was there for a couple of years before I actually chose my account, and I lost out on that earnings. So that's what I would tell her like to not just start now, educate yourself, see it through, ask questions.
BRAD SMITH: We mentioned from the study from Fidelity how many people do not have enough set aside for retirement. What can people do if they don't have enough or make enough to set aside for retirement right now?
TIFFANY ALICHE: And honestly, that's going to be so many people. So one, whatever you can set aside, set it aside. You're also going to want to really look about increasing your income. We hate to hear the word side "hustle," but what other things can you do to make more money? Can you budget a little better? Maybe there some expenses you can get rid of so you can put more money toward retirement.
Also, consider that retirement might look like working for you. You might have to work part time to supplement your retirement income. And also, don't give up. Like, it can feel really overwhelming, but retirement can be still a pleasurable experience if you start to do something now.
BRAD SMITH: OK. And just once you finally set that up for yourself and you say, hey, I'm ready to retire, what are the pitfalls that you need to avoid once you've retired so that you can responsibly tap into the budget that you've created for yourself?
TIFFANY ALICHE: So once you've retired, I want you to make sure that you're really looking at your health care expenses. It's one of the main expenses that are going to go up once you're retired. And so like now might not be the time. I get it that we all want to throw money away at our private island, but you might want to make sure that you have enough health care expenses to cover whatever that's going to look like.
Also two, like, mapping out what life looks like. We're living longer and longer and longer. How much do you actually need? Can you reduce some expenses? Now's a great time to say, do we need this big old house? Maybe there's something smaller. Maybe we can style this house and put that money toward retirement as well. And enjoy. You know, you work so hard. Enjoy, enjoy, enjoy.
