What is the recommended retirement savings by age? It appears that millennials and Gen Z are falling behind on their retirement savings, according to a recent study by Fidelity.
Robert ‘Bob’ Powell, and award-winning author and retirement expert, Anne Lester, break down the findings and provide retirement advice for millennials and Gen Z, including their tips on how to pay down student loan debt while still saving for retirement.
Advice for millennials and Gen Z (00:28)
In an analysis of its 23.3 million 401(k) participants at the end of Q1 this year, Fidelity found that the average balance for Gen Z increased 15 percent from the fourth quarter to $11,300, compared to an 11 percent increase to $59,800 for millennials. Across all generations, the average balance rose 6 percent to $125,900.
Lester believes we should take those numbers with a grain of salt. “Number one, the oldest Gen Zers are 27, so they have a little more time,” Lester explained. “Number two, there is a lot of job hopping happening with younger workers. And so, to what extent have those people worked for the same company for the entire time or rolled their money over into the new plan? So it’s possible that those numbers may be slightly understating the amount people have actually saved.”
S.T.A.S.H. (12:40)
Powell and Lester broke down the acronym S.T.A.S.H., discussed in Lester’s book, ‘Your Best Financial Life: Save Smart Now for the Future You Want’. According to Lester, S.T.A.S.H. stands for the 5 things the next generation should be thinking about to build their retirement savings.
S. Save for a rainy day
T. Tax advantage savings
A. Assess your budget and pay off debt
S. Stay the course and max out your retirement savings
H. Have fun!
Lester explained, “I think executing that S.T.A.S.H. is really about making sure you’ve got the emergency savings fund. You have eliminated all of your high interest rate debt, and you are putting 10 to 15 percent into that long-term savings.”
Ask Bob (21:00)
In our special segment, Ask Bob, Bob answers the most common retirement and investing questions from our listeners.
Question:
Is there an upfront charge, besides the income tax or income related monthly adjustment amount (IRMAA), for an IRA to Roth conversion?
Answer:
There is no charge for a Roth conversion. However, the amount converted from the traditional IRA to the Roth IRA is subject to ordinary income tax in the year of the conversion. This includes any pre-tax contributions and earnings that were in the traditional IRA. There may also be what Andy Ives, an IRA expert with Ed Slott & Co., calls ‘stealth taxes’ due.
For instance, Medicare beneficiaries may have to pay what’s called an income related month adjustment amount or IRMAA. IRMAA is an extra charge added to the premiums for Medicare Part B (medical insurance) and Part D (prescription drug coverage) for beneficiaries with higher incomes. Other individuals who are enrolled in an affordable care act health insurance may learn that their advanced premium tax credit is reduced or eliminated because the Roth IRA conversion increases your modified adjusted gross income.And lastly, there’s a chance that a Roth IRA conversion could push you into a higher tax bracket.
Question:
I first opened a Roth IRA in 2020. I have since put money in the Roth in 2021, 2022, and 2023. I understand you have to wait five years before you can begin withdrawal without any taxes, principal and gains. Based on this I can take out my 2020 money in 2025? Correct? When can I withdraw my 2021 money? 2025 also or is it five years from when money went into account? So, 2021 I can withdraw in 2026, 2022 in 2027 and so on? Or is all money available for withdrawal beginning in 2025?
Answer:
You can receive the earnings on all of your Roth IRA contributions tax-free once you satisfy a five-year holding period and you are over age 59 ½. The five-year period starts on January 1 of the year you first fund any Roth IRA. Since you opened your first Roth IRA in 2020, your five-year period ends on 12/31/24. So, all of your Roth funds are available tax-free starting in 2025. Since you’re over 59 ½, there also won’t be a penalty, according to Ian Berger, an IRA analyst with Ed Slott & Company.
Video highlights:
00:28 – Advice for millennials and Gen Z to catch up on retirement
03:00 – If I switch jobs, should I roll over my 401(k)?
06:55 – How to pay down student loan debt and save for retirement
11:20 – Importance of insurance while saving for retirement
12:40 – S.T.A.S.H. – How the next generation can build their retirement savings
15:50 – FOMO – How to plan for retirement without missing out
18:45 – Anne’s advice from ‘Your Best Financial Life’
21:00 – Ask Bob – Is there an upfront charge for an IRA to Roth IRA conversion?
22:45 – Ask Bob – When can I take money out of my Roth IRA?
Retirement planning doesn’t mean locking up your money for a rainy day and forgetting about it. Planning your future means reacting to events today. Decoding Retirement gives you the tools to navigate the years ahead, and take action now!
Yahoo Finance’s Decoding Retirement is hosted by Robert Powell, and produced by Zach Faulds and Alexander Frangeskides.
Find this episode’s transcripts and more episodes of Decoding Retirement at https://finance.yahoo.com/videos/series/decoding-retirement.
Thoughts? Questions? Fan mail? Email us at yfpodcasts@yahooinc.com.
Editor’s note: This post was written by Zach Faulds.
Video Transcript
How much should you have saved for retirement?
Well, that’s the question we’re going to answer on today’s episode of Decoding Retirement.
Hi, I’m Bob Powell.
And today we’ll be talking with Ann Lester who is author of your Best Financial Life.
Ann Welcome.
Thanks for having me.
Oh, it’s a pleasure.
So, one of the things that we aim to do on Decoding retirement is to go behind the headlines and I wanna share with you some headlines that came out recently.
It was a study by Fidelity Investments and Fidelity.
In essence, reported that Gen Z plan participants, 401k plan participants had saved 11,300 in their 401k plan.
Millennials had saved $59,800.
And one of the interesting things about this survey to me is fidelity and others.
JP Morgan T Rowe Price.
Others have said there are certain savings targets that people should aim for one times your salary by age 33 times by age 48 times by age 6010 times by age 67.
And when I look at the average salaries for Gen Z and millennials, what strikes me is that those asset amounts are way below targets.
And I’m curious one, your reaction to the survey and also what’s the actionable advice for people who may be behind the eight ball?
Yeah.
So I, I always wanted approach these numbers with a tiny grain of salt.
So one is averages, hide a lot, right.
So some people are saving nothing.
Some people just started saving last week.
Some people have been saving 10 or 15% of their salary since the day they started working and they get the gold star.
Um But let’s just say that $11,000 number, if you are 30 years old, that means you should have saved 100 and $10,000.
Uh No, I’m doing that math wrong.
If you say if you’re earning $56,000 a year and you’re 30 years old, you should have earned saved up $56,000 right?
So, uh that is a big gap from 11,000 to 56 6000.
So number one, the oldest gen Z are 27.
So they got a little more time.
Uh Number two, there is a lot of job hopping happening with younger workers.
And so, you know, to what extent have those people worked for the same company for the entire time or rolled their money over into the new plant.
So it’s possible that those numbers may be slightly understating the amount people have actually saved.
But I think the headline is probably right, like people should be saving more money.
Right.
So, I think about that.
Um, I have a daughter, uh, she’s changed jobs twice now and left her 401k at her former employer had, did not roll it over to her new employer or into a IRA.
So, in that case, um, we’re looking at perhaps this possibility that she does have one times her salary saved or something.
Just not all in one place.
Right.
So, and I’m thinking if someone is in that case, it’s far better for them to roll over their old 401k to their new employer if they can.
That’s always, I think the right strategy.
Right.
And if not keep it at the old employer or move it to an IRA.
It depends.
Right.
And I know we’ll talk about this a little bit.
I, I wrote a book recently and I dive into a lot of these questions and, and one of the things you need to think about is, you know, the, the mental tax on, like dealing with it, which is nontrivial, like it’s actually not super easy.
I know there is a whole bunch of initiatives to make this easier, but we’re not quite there yet.
Um, number two, you know, if your old plan is, uh, the fees are high, um, you may want to roll it out into an IRA if the fees are very low.
If you work for a very large company, it’s very likely that you are paying very, very low fees and it’s probably better to leave it alone.
Um, but you got to do a little research to make that decision.
The bottom line though is if you’re leaving it in your own planet safe, you just don’t want to forget about it.
Right.
So, the important thing is if you have multiple accounts or one account to use these benchmarks one times, uh, your income at age 30 absolutely.
I think that’s a really good rule of thumb.
It’s, you know, when you get closer to retirement, if you’re in your fifties or sixties, you might want to start like digging in a lot more to these general rules of thumb.
But certainly in your twenties, thirties and forties, I think those are very practical sort of ways to gauge whether or not you’re kind of roughly on track.
Yeah.
And, and what about if someone’s behind the eight ball?
So they’re, they have 11,000 saved.
They need to have 56 increase their contribution rate.
Uh All, all of the above.
So, so most people are not saving quite enough, right?
And Gen Z are actually out of all the generations when you look at the data, um doing a better job of being closer to what we think people should have because more gen Z are getting automatically enrolled in plans and this is a fairly recent trend, but more employers are starting to automatically escalate their contributions or increase them.
If you’ve been automatically enrolled into a plan at 3% of your salary, that’s a great place to start.
But it’s a terrible place to stop.
You really need to be targeting 10 to 15% of your salary over time.
The trick is you don’t need to try to get there all at once.
So if, let’s say you’re 25 you’re earning $50,000 a year.
And I’m telling you, yeah, you should try to save 5 to $7000 of your salary.
You’re gonna tell me to jump in the lake, right?
So how do you get there from here?
Well, you don’t try to get there all in one go.
What you do is borrow uh, a trick from the Nobel Prize winners who uh came up with save more tomorrow.
And that means you make a very strict commitment to yourself today that the next time you get a raise, which will hopefully be in three or four months at year end, you will take half of that raise and direct it towards your long term savings.
All right.
So the common advice though is for people to take advantage of the full employer match.
And oftentimes that means contributing 6% in order to get 3% extra, which puts you at nine.
I think that is 100% directionally where you need to be.
The question is if you are starting out and you’re in your early twenties and you’re living in a city that is expensive.
That’s, that’s just really hard to get there.
And I guess the, the thing I want people to take away is you need to have that as your goal to get there.
You don’t have to start there if you’re still trying to figure out how to balance your checkbook, like, like don’t set this incredibly high bar fail and then say this is never going to work.
I give up, right.
Make it, make it a plan.
How am I going to get from where I am today to where I need to be in a year and then you step into that gradually so we can throw up the ramen noodle diet for now.
Well, if that’s what you need to do to stay out of a debt, you need to be ramen noodles.
But the next time you get a raise, you can take a little bit of that money and like upgrade from the Ramen noodles and also save more.
Yeah.
So when I think about debt, I think a lot of these younger workers not are, are only the there are two things.
One is they’re trying to save for retirement, which seems implausible when you’re in your twenties, but also pay down student loan debt and, and that’s a hard thing to do.
You’ve got these two huge expenses.
Well, and rent, let’s not forget rent.
I mean, it’s, it’s, it’s, it’s it’s a lot.
Right.
So, so you’re looking at, I think a lot of people starting out are, are, you know, you pay, you get your net paycheck, right.
You’ve paid your payroll taxes, you’ve paid your income tax, you’ve paid for your health insurance and you know what’s left is already 60 to 70% of what you thought you were gonna get.
Right.
So, that’s already a little math.
Then you pay for your rent and then you pay for your student loans.
Then with what you’ve got left, you need to create an emergency savings fund and save for retirement.
So again, starting out first job out of college, I think it’s very unrealistic to expect people to be able to save 10 to 15%.
So all I’m saying is start slow, start immediately in the course of three or four years, you should be planning on building up that percentage that you’re saving until you get to that 10 to 15%.
And I think that is very doable for many people, most people even.
So if someone does have student debt, I’m thinking and especially because of secure 2.0 some employers not all will match the amount that you’re paying towards student loan debt, right?
And that is, you know, starting early for, for saving for retirement is the biggest gift you can give yourself, right?
The power of compound returns is one of the biggest things most people don’t get.
So the dollar you save in your twenties is going to be worth, you know, triple or quadruple that amount in your fifties and sixties.
So, so it’s really important to start early.
If your employer matches, you should absolutely be taking advantage of that because that is free money.
Right.
And, and if that’s the case, would you suggest that they put all of their extra money toward paying down student debt or split it?
I think it’s very important to have an emergency savings fund.
I think that is absolutely critical.
So I think if you have the opportunity to pay down your student loan debt and you have zero in emergency savings, you should be trying to do both of those.
Once you have an emergency savings fund built up, then I think it’s really important to take that money that you were saving for emergencies and throw it into your long term savings, whether that’s paying down debt and getting all of the match, um or whether that’s just starting to contribute money into the 401k plan as well.
I think the the question right about how much fun money do you give yourself is a really personal one.
I am a walking uh example of someone who has uh been much more of a, a grasshopper uh than an ant.
Um And I have never met something fun that I don’t want to spend my money on, but that’s pretty true.
Um So I struggle a little with that rule that says you should be, you know, maximizing your saving from the get go.
Um I think if you feel poor and like you’re missing out on things, it’s, it’s a tough thing to feel.
At the same time, you need to figure out how to pull your lifestyle down to a place where you’re not increasing your debt burden, right?
You don’t want to be putting anything on credit cards.
You don’t want to be running up that debt.
But I think again, and I’m speaking, especially when you’re just starting out and you’re at those very low salaries, you can expect fairly significant pay increases for the first sort of decade or two of your working career.
And it is ok to let your lifestyle increase a little bit along with those increases in pay you.
The trick though is to not let your lifestyle completely eat up all of those raises.
That’s when you really want to boost your savings.
So, like I said, I think you can start saving less in your early twenties and be targeting that 10 to 15% by the time you hit 30.
All right.
So, uh for young workers, this is extremely complicated.
Uh Let me throw out a rule of thumb for budgeting where some people suggest 50 30 20 as the rule of thumb, 50% for sort of essential expenses, 20% for savings and debt and the rest for um fun I think that’s a great rule.
I guess.
I just, you know, having talked to my own kids and a lot of young people who are starting out that 30% is like, not there because the rent is so high.
Right?
I mean, so it’s like, really, what, what’s the bucket of money you have left after you pay off your housing, after you pay for a minimum amount of food and after you pay for all your debt servicing whether it’s student loans or other debt, you might have run up and then that to me, you should be saving half of it and spending the other half on fun, right?
So we’ve talked about saving for retirement paying down debt.
There are other expenses that they need to think about disability insurance, maybe life insurance so that they can guarantee insurability, uh health insurance, et cetera, et cetera, et cetera.
I think one of the biggest risks people run is the risk of catastrophe, right?
And, and that is really what insurance is for.
So health insurance is a very common catastrophe that is, you know, when you’re in your twenties, you tend to think you’re invincible.
You have no health problem, you know, everything’s great and then you have an accident, something ha you know, all kinds of things can really derail you.
So being under insured, whether it’s for health insurance, renters insurance, if you’re renting, right?
You are one roommate for getting to lock the door away from, like, getting wiped out.
Um, uh, car insurance.
Right.
Not insuring your vehicle for its replacement value, but just getting the bare bones minimum, which I think a lot of people do.
I did that once and, uh, never again, uh, after somebody else hit my car and I, you know, like that was it.
I had to dig deep in my pockets.
The car was, I was, it’s not worth insuring this car.
It’s only worth a couple 1000 bucks.
Well, let me tell you, I was very sorry, I made that decision right.
So being underinsured is a huge risk for people and most people don’t understand that running it.
Insurance is cheap.
Health insurance, different story.
Every other kind of insurance is really pretty cheap and we have to take a short break right now, but when we come back, we’re going to talk more about your book, Your Best Financial Life.
Welcome back to Decoding Retirement.
We’re talking with Ann Lester who is the author of Your Best Financial Life.
And I want to talk more about the book and uh in the book, you have some actionable advice.
I want to get to uh one is this notion of stash the acronym and how young adults can hack their brains to stash more money.
That’s it.
Um And we have actually been talking about it a little bit, right?
A stash uh stands for sort of the five things you should be thinking about.
Number one is save for a rainy day, right?
That emergency savings fund.
Number two, tax advantage savings.
So using uh the power of compound returns and the growth of that money to really uh grow your money.
So tt taxware savings, uh the A is uh assess your budget and pay off debt.
So once you start your emergency savings fund, once you’re getting at a minimum, the match, which is your first target, right?
To get that match and get the free money, free money, then you start paying down debt.
Now that is a little there’s some disagreement uh in the people sort of talk about this stuff about whether you should be tackling debt first or long term savings.
First for me, the power of compound return over time plus the 401k match.
If you get, it is more important than aggressively paying down debt.
Once you get that match, you get the free money, which is doubling your return.
Um because they’re doubling what you put in right out of the gate, then you aggressively pay off debt after you are debt free for everything but low interest rate debt.
And again, people can argue about what that means in my book, I refer to anything under 7% as being low interest rate, which is less than what you might earn in the stock market uh or in a balanced portfolio.
Um So typically a mortgage tip, some federally guaranteed student loan, right is below that 7% rate.
Everything else you should be paying off as fast as you can.
Then you go to the fourth step of stash, um, which is the, the s, which is, uh, uh, max out your four, stay the course and max out on your, uh, retirement savings and get up to that 10 to 15%.
And then the H stands for, have fun.
Right.
Once you get to that, let’s call it 15% savings rate, you really should then be allowing yourself to enjoy more.
Maybe you’re gonna save more money and save it up for a bigger down payment or, uh, for a fancy vacation or maybe then you want to think about not retiring at 67 but at 60 or, you know, that’s when you have a little more room to think about different kinds of goals.
But, you know, I think executing that stash is really about making sure you’ve got the emergency savings fund.
You are, have eliminated all of your high interest rate debt and you are putting again 10 to 15% into that long term savings.
Right?
So, as you’re talking, and, and you mentioned the ant and the grasshopper story a little bit ago, I think about how many young people have two things going on.
Present bias, the possibility that they value today’s dollar more than tomorrow’s dollar and this notion of fear of missing out and having fun.
So I’d rather go out to this and do that or this concert or go to London and see Taylor Swift or whatever the case may be because tomorrow I’ll have another dollar and I can worry about that then.
So true.
So true.
I mean, I, uh, you know, I’m out there giving speeches and stuff and in, in one of my speeches I won’t do the whole thing now.
But I’m like, so I’m watching Netflix and it’s 10 o’clock and the next episode starts and I hit skip intro and think, wait a minute, what time do I have to wake up?
And then it’s 1030 then I hit skip intro again.
And then the next thing, you know, it’s one o’clock in the morning and you think I’ve only got one episode left, I’m gonna keep watching.
Right.
We’ve, we’ve all done that.
That is present bias in action right there.
Right.
What is happening right now is far more important than the future, which is tomorrow morning.
Right.
So, it’s a thing.
Um, I think the most important thing we can do is get curious about how we are wired.
Like it took me a really long time to accept that.
I am a grasshopper.
I routinely start reading a book at 930 at two o’clock, I’m like, oh, boy, am I gonna be sorry to, I still do it right.
And I have learned not to let myself start reading without either.
Setting my phone alarm on and putting it across the room.
So I have to stand up to turn it off.
Ok. That’s my signal.
Stop reading and go to bed.
Like I, I’m bad at that.
I’m bad at that kind of impulse control.
Right.
I just am.
So I know that about myself with something as silly as staying up late reading a book and I can then create hacks turn on my phone alarm, set it out of reach so that I have to stand up which disrupts me enough to go.
Wait.
Whoa What time is it?
I better put my phone.
I gotta go to bed.
You can do that with food, you can do that with money.
Right.
How do I understand what my own biases are?
My own impulses enough to figure out how to interrupt them?
Right.
So, uh, one of the most powerful things that is now helping Gen Zers and anybody who changes jobs is getting automatically enrolled, right.
When you and I started working, we got these, you know, 150 or 200 page enrollment kits that we had to fill out and mail in with hundreds of pages of information to look at.
Like that was horrible.
What the stats were?
50 to 60% of people signed up.
If your employer signs you up, only 3 to 7% of the people drop out.
Right.
It’s magic.
That’s a huge hack.
So, is your employer automatically increasing your savings rates.
That is, that’s another hack.
Most people stay with the plan, they don’t drop out because they know they should.
If your employer doesn’t do that for you automatically, you can do it to yourself by again, either asking them to increase your contribution rate or just saying, hey, Jan one got a raise.
I’m gonna, I’m gonna bump up my rate, right.
Those are hacks that will help you stay on track.
So a as I look at your book and the topics in there and I think about your Children, which you, I believe, dedicate the book to.
So have they incorporated your advice?
It’s funny, you know, it, my older son, uh like me uh has an eye for like you could put me in a store with no price tags and I would unerringly find the most expensive thing.
It’s a gift, not a good one, but it’s a gift.
Um And my older son is like that, but he is being really ruthless about creating guardrails for himself and he is 100% you know, you know, my Children were also fortunate enough to, to graduate from college debt free.
That was something my husband and I felt very strongly about.
Um they’re on their own for grad school.
Uh but, but they have managed to, you know, get out of college debt free.
And, and so that is a huge boost that they, and, and I, I said that to my son when he started.
I’m like, well, look, you’ve, you’ve, you’re not paying off student loans, you should be throwing money in your savings plan.
So, so they’re following that.
My younger son, um, is much less, uh, like me and much more like my husband.
He’s like, I, I don’t have the money.
I don’t care.
Um, uh, but he’s also a musician and is gonna be leading a really different life, right?
It’s all on him to be saving and investing.
And you know, we’ve had a lot of talks about how do you think about managing a, a gig, a gig world when you don’t have a 401 you don’t have somebody automatically enrolling you.
How do you think about structuring your spending if you have great uncertainty about what your income is going to be like?
Yeah, so quick question, given the amount of jargon and how obscure this can be to some people whose day job is this and this requires a whole another day job.
A should young workers go to a financial adviser for help?
I think financial advisor can be incredibly helpful.
I think most people starting out have pretty straightforward financial lives and not to talk what I used to do for a living.
I used to manage target date funds for a living, right?
So, so I think a target date fund is a great answer for someone just starting out or a balanced account or a Robo platform.
I don’t know that you need a financial advisor unless you are struggling with how to budget and save.
And then I think having someone who can help you understand your own finances, um, understand where your money is going.
You know, someone who takes a percentage of your assets.
Um, when you’re just starting out, I think those fees are probably going to be very high and there might be other places to find that kind of helps.
So, Anne, it’s now time that we turn our attention to questions that we get from our readers and listeners about money and retirement in the segment that we call, ask Bob the first question that came in, in essence, uh goes like this.
Uh, is there an upfront charge when I convert my traditional Ira to a rough ira?
And in essence, the answer is no, there’s no one charging you a fee to do that.
But however, you will be paying uh ordinary income tax on the distribution from your traditional Ira.
And you need to be aware of what that tax will be and how it might affect other things.
If you are Medicare Ben, if you’re a Medicare beneficiary, you might um, be subject to Irma.
If, if that puts you into a higher uh, income bracket modified, adjust as gross income is the jargony term.
And if you’re pre Medicare and on the ac a plan, it could affect your, the advanced premium tax credit that you get.
So, and it can also bump you up into a higher tax bracket.
So, so, uh, it’s interesting.
I was just talking to my parents financial advisor about that.
My parents are, uh, both in their nineties and, uh, doing some chatting about justice subject and it was gonna bump them up like four tax brackets if they did a conversion.
It’s like, whoa, never mind.
We’re just gonna leave that money right where it is.
Thank you very much because that’s, it would radically alter all kinds of things about.
Now, most people, again, if you’re younger may not matter that much.
Um, we can chat a little bit about, you know, if you’re just starting out and have the choice about contributing to a Roth or regular, like we can talk about how you might think about that decision, but that conversion, right?
The government’s going to make you pay, not necessarily your service provider like that should be free.
So one last final word is you don’t have to do a full conversion.
You can do a partial conversion.
So another question that came in is, can I withdraw money from my Roth Ira after I’ve contributed?
And the answer is yes.
If you’ve held that for five years, otherwise you’ll pay a penalty on that distribution.
And uh there are a couple other nuances to that.
But in essence, if you’ve had the Roth Ira Open for five years you can withdraw money from it.
Um, any thoughts?
Well, 59.5 is one of those ages that you need to pay attention to where the half comes from.
I do not know.
Um, but that is the age from which you are sort of normally allowed to start withdrawing before that you’d pay a, uh, early withdrawal penalty.
Roth Ira s have other things you’re allowed to pull money out for, you know, down payment on house education expenses and stuff.
So, you know, a Roth gives you a little more flexibility, but you still have to keep an eye on the fine print.
So uh thank you, Ann for sharing your thoughts on these questions from our readers and listeners.
If you’ve got questions about money or retirement, email us at Ask Bob at Yahoo finance.com, that’s all the time we have today on this episode of Decoding Retirement.
Stay tuned for future episodes.
We’ll, we’ll be talking to other experts who can help you plan for and live in retirement.
This content was not intended to be financial advice and should not be used as a substitute for professional financial services.