Retirement Savings

Do You Act Your Retirement Savings Age?

March 3, 2016
A guide to help every generation save more effectively.

Key Points

  • You need to prepare for a retirement that could encompass a third of your life span.
  • Generations are at different levels of preparedness for this post-employment period.
  • Adopt saving and investing guidelines appropriate to your generation in order to maintain your standard of living in retirement.

Depending on how old you are, you may be tempted to put retirement savings behind paying down debt, funding a child’s education, or other financial goals on your list of priorities.

However, since you need to accumulate enough money to cover expenses for the third of your life that you aren’t working, saving for retirement should be your top priority at any age, says Judith Ward, CFP®, a senior financial planner with T. Rowe Price. How best to achieve your retirement savings goal varies considerably depending on your age and personal circumstances. The good news is that you can “act your savings age” by adopting a group of saving and investing guidelines to help you start or stay on track. “As your age changes, those guidelines will change with you,” Ward says.

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How the generations save and invest

Consider the differences among three generations of investors:

Millennials who are saving in a 401(k) plan are outpacing financial expectations, according to T. Rowe Price’s 2015 Retirement Saving and Spending study. Of those who are working, many report being well positioned for financial success. Not only are they contributing at a similar rate to their 401(k)s as are Gen Xers, but they also have more time on their side—the efforts they make now to save and invest for their future have decades to realize growth potential.  

While it may be youthful optimism, this group possesses a positive attitude about their current and future financial status. Our research also indicates that they may lack the knowledge needed to go it alone—58% say they would benefit from having someone help with spending and debt management. This segment of the Millennial generation could rely on automated plan services to get them started, as well as advice and guidance to keep them on track.

Gen Xers are well into their careers and have seen their earnings rise since their 20s. But their financial demands have increased as well, including often supporting young children and aging parents simultaneously—which can make it challenging to prioritize savings
goals. In T. Rowe Price’s study, about 70% of Gen X workers felt somewhat or very comfortable that they will be able to meet their financial goals in retirement.

However, 28% of Gen Xers believe they may run out of money in retirement, given the savings they have in place right now (versus 22% of Millennials).

Baby Boomers as a whole have prioritized their retirement savings and contribute more than any other generation. Recent Boomer retirees are reporting that many in their cohort are faring quite well with managing their finances and are transitioning into retirement with adequate savings. In fact, according to T. Rowe Price’s study, retirees who are in their first five years of retirement are living on an average of 67% of their preretirement income, and 88% say they are satisfied with retirement so far.

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The common threads

There are effective savings behaviors that can help at any age. “How much you set aside and how long you save are the two factors that have the most impact on your long-term goals,” Ward says. “They are also the factors most in your control.”

Regardless of your age, consider the following steps:

  1. Take advantage of any company match. Contribute at least enough to your workplace plan to receive the full company match, if offered by your plan. That way, you’ll receive the maximum amount of “free money” to which you’re entitled.
  2. Save at least 15% of your gross income. Contributing to retirement accounts at this level (including any employer matching contributions) can help you cover your expenses over a retirement that may last three decades or longer. If you are married and take time out of the workforce for any reason, consider opening a spousal IRA to keep your savings on track.
  3. Consider Roth contributions. A Roth IRA or Roth contributions, if offered by your employer plan, may be the better choice for your retirement savings, unless you are age 50 or older and expect your tax bracket to decrease significantly in retirement. (Read: Should I Have a Roth IRA?)
  4. Maintain appropriate equity exposure for your age. Equities offer greater long-term potential return than other asset classes, such as fixed income and cash. Your age and tolerance for risk will help you determine the precise amount of equities to hold.

Generational To-Dos

While big-picture retirement savings priorities are the same across generations, the details shift based on age.

Millennials: You may be actively managing your finances while looking for some direction on how to allocate your assets. Following some basic tips can help you to establish a solid foundation for your retirement savings.

  • Make sure you’re tracking your expenses, and develop a budget you can follow.
  • Balance your other financial priorities, such as paying down debt, with saving for your retirement.
  • If you can’t hit the 15% retirement savings target right now, work your way there with annual increases. Use your workplace plan’s auto-increase option, if offered.
  • Consider maintaining a high exposure to equities (90% or more) in your retirement account. With decades to retirement, you can take full advantage of the growth potential.

Gen Xers: You might be bringing in more money now, but you also might be facing competing financial priorities, such as saving or paying for your children’s college expenses. It’s important to keep your retirement investing as a priority.

  • Continue investing for retirement regardless of your other financial goals. The amount you invest now likely will influence your retirement income the most.
  • If you got a late start, aim to save more than 15% of your income. Use the auto-increase feature in your workplace plan if you have access to one.
  • Consider maintaining a high exposure to equities (80% to 100%). Even when you are 11 to 15 years from retiring, you should still have 80% of your portfolio allocated to equities.
  • Don’t forget about managing savings you may have in old workplace savings plans. (Read: Your Options for an Old 401(k).)

Baby Boomers: “You are either gearing up for retirement in the next decade or so or bringing it in for a landing,” says Ward. These tips can help whether you’ve fallen a bit behind with your savings or you’re looking for some additional help to stay on track.

  • If you got a late start saving for retirement, consider saving more than 15% of your income, including any company match.
  • Take advantage of catch-up contributions for IRAs and workplace plans, if needed. If you are or plan to be self-employed, look into contributing to a SEP-IRA or an
    Individual 401(k).
  • Consider a balanced approach to asset allocation, maintaining appropriate exposure to equity for sufficient growth potential in your portfolio (60% if you are still working, gradually decreasing as you move into retirement) and fixed income and cash investments to dampen volatility.
  • Don’t forget about managing savings you may have in old workplace savings plans.
  • Think about your sources of retirement income, including Social Security benefits, income from a pension, and even part-time work. Then consider how much you will need to maintain a comfortable standard of living—a flexible 4% withdrawal guideline offers a way to balance your need for income in retirement with your desire not to outlive your assets.

View investment professional background on FINRA's BrokerCheck.

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