Play the Percentages: 20-Something

Retirement Planning Article

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Play the Percentages: 20-Something
by Rande Spiegelman, CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research
March 15, 2005

In How Much Should You Save For Retirement? Play The Percentages we looked at the percentage of your pre-tax salary you should be saving now to have a good chance of maintaining your lifestyle over a 30-year retirement.

We started with these assumptions:

No previous retirement savings—you're starting from zero. If you already have retirement savings (and you're a Schwab client), you can log in and use the Schwab Retirement Planner to run your own numbers.
You plan to spend 80%* of your pre-retirement, pre-tax income in retirement, adjusted for inflation and highly likely to be sustainable for roughly 30 years (assumes retirement at age 65).
Social Security or other income will provide 25% of your retirement income needs each year. Your portfolio will have to provide for the rest of your spending needs in retirement. (We assume a conservative-to-moderate portfolio allocation in retirement, with no intent to leave a portion of the portfolio to any heirs.)
Your pre-retirement income will grow (at least enough to keep pace with inflation) during your working years.
You average a compound annual return of 8% on your pre-retirement investments, with 2.5% inflation.

Here's a recap of our broad recommendations for how much you should be saving.

Saving for retirement

Age when saving starts	% of salary to save each year
20-something	10%-15%
30-something	15%-25%
Early 40s	25%-35%
45 and older	OUCH! (see Play the Percentages: 45 and Older)

20-somethings
Let’s take a closer look at the numbers if you're in your 20s. We’ll start at age 22, under the assumption you don't start working full-time until after college.

What 20-somethings should be saving for retirement

Age when saving starts	% of salary to save each year
22	10%
23	10%
24	11%
25	12%
26	12%
27	13%
28	14%
29	15%

The earlier you start, the lower the percentage of your salary you need to save for the rest of your working years, provided you stick with it. And remember, these are minimum targets—if you can save more, all the better.

Advice for 20-somethings

You have a great opportunity to lock in a low savings percentage, because you’re in the best position to take advantage of potential long-term returns on your investments.
Do what you can to get used to living on a little less now—it will be a lot harder later on, after years of spending at or beyond your means.
Beginning with your first job out of school, set your 401(k) contribution to at least 10%-15% (more is always better if you can swing it).
Resist the temptation to cut back on saving for retirement, regardless of what’s going on elsewhere in your life. Convince yourself that your retirement funds are untouchable; don’t tap the till for anything but retirement. Yes, it takes discipline, but worthwhile goals are seldom easy.

Keep in mind these are only general guidelines to help you plan for a secure retirement. Everyone’s situation and goals are different. If you'd like to take a closer look at your unique circumstances, Schwab can help.

*For people 40 or older who have not yet started to save, the retirement spending goal is 70% of pre-retirement, pre-tax income—a higher level would require an unreasonable percentage of current savings.

The information presented does not consider your particular investment objectives or financial situation and does not make personalized recommendations. This information should not be construed as an offer to sell or a solicitation of an offer to buy any security. The investment strategies and the securities shown may not be suitable for you. Investors should consult their own tax and investment advisors about their specific situation prior to taking action based on this article. We believe the information provided is reliable, but Charles Schwab & Co., Inc. ("Schwab") and its affiliates do not guarantee its accuracy, timeliness, or completeness. Any opinions expressed herein are subject to change without notice.

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