If you have a child in their 20s, chances are they’re not really thinking about retirement. That’s why Suze Orman suggests that it’s time to give them a gentle nudge to start retirement planning ASAP.
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“This is exactly the age when they can give themselves a huge leg up on retirement,” she wrote in a recent blog post. “They just might need you to help them realize that.”
Even if you and your kids think it’s too early to start planning for retirement, that’s simply not the case.
“Even though you and I both know it is ridiculous to think that just when someone is launching into adulthood they should focus on retirement, … that’s what our retirement system requires,” Orman wrote. “Making one smart choice in their 20s will set them up for success. Waiting until their 30s (or 40s) to focus means a harder slog.”
Here’s the “one smart choice” Orman is referring to.
Save 15% of Your Income in a Retirement Account
Orman said that the one strategy every 20-something must follow is to set aside 15% of their income for retirement.
“All they need to do is nail one key number: 15%,” she wrote on her blog. “Their goal in their 20s should be to save 15% of their income in a retirement account.”
Orman said that ideally, this will be a Roth account.
“That can be through a workplace retirement plan, or their own Individual Retirement Account (IRA). In both instances, encourage them to use a Roth, not a traditional account,” she wrote. “Most 401(k) [plans] now offer a Roth option, and I am confident that someone in their early 20s meets the income limits for contributing to a Roth IRA.”
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Why 15% Is the Magic Number
Although 15% might seem ambitious for someone just starting out in their career, their future self will be thankful.
“The 15% savings rate is based on a lot of smart people doing a lot of mind-numbing number-crunching that factors in how investments grow over time, how much of our work-years income we need to live comfortably in retirement, and how much other income sources, such as Social Security will provide,” Orman wrote.
And it’s imperative they start now.
“Someone who starts saving 15% of their income by age 25 and keeps at it will be in good shape decades from now,” Orman wrote. “Wait[ing] until 35 or 45 to get focused on retirement saving means having to save a lot more to land in retirement in solid shape. While 15% can seem like a big ask for today, my hope is that you can help young adults in your life see that it is an act of financial self-care that will make their lives easier in the coming decades.”
How To Realistically Save 15% When You’re in Your 20s
Orman acknowledges that while saving 15% of their income will be challenging, it’s best for your young adult children to just commit to it and do it.
“My advice is that they just dive in cold,” she wrote. “That is, commit to automatically saving 15% of their income ASAP. The faster this becomes a habit, the easier it is to pull off.”
Orman recommends making this contribution automatic to prevent lifestyle creep from getting in the way.
“We’re all susceptible to lifestyle creep: as income increases it’s all too common to just spend more, rather than save more,” she wrote. “By anchoring your financial life early to a goal of saving 15% of your income for retirement, you are defending against lifestyle creep. That 15% saving commitment becomes your automated priority that comes before spending.”
Orman said to factor in this 15% contribution first, and then figure out how much you can budget for other expenses with what’s left over.
“Of course, you also need to spend on essentials: rent, food, etc.,” she wrote. “But here, too, I am going to insist that the 15% savings for retirement gets prioritized.
“Then you right-size your spending around that,” Orman continued. “If that means renting a less expensive place, that’s the right trade-off. If that means eating in a bit more than eating out, that’s the right tradeoff. If that means focusing more on needs vs. wants, that’s the right tradeoff.”
What Other Experts Say
Financial experts generally recommend saving 10% to 15% of your income for retirement. While Orman is strict with her belief that 15% is the magic number, other experts say it’s OK to start at at a lower percentage when you’re younger and work your way up to 15%.
“Saving 10% of your salary can sound like a lot, especially in the early years when your salary may be lower,” said Kris Carroll, CFA, CFP and managing director of the Carolinas at Wealth Enhancement Group. “One way to achieve this is to start saving early and gradually increase your savings rate over time.”
Other experts believe that you should ultimately aim to save 30% of your income.
“Of course, everyone’s lifestyle, living expenses and family situation are different,” said Chris Urban, CFP and founder of Discovery Wealth Planning. “So it’s important to keep that in mind as you consider which end of the range you are on.”
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This article originally appeared on GOBankingRates.com: Suze Orman: Parents, Teach Your Young Adult Kids This Retirement Strategy Now
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