How To Start Saving For Retirement

Even If Your Finances Are A Mess

Photo by Tom Cleary on Unsplash

Unless you are in the minority of people who have a defined benefit pension plan, one of the most important financial questions we all struggle with is “how much do I need to retire?”. The thought of running out of money in retirement is really scary.

It’s also a really complicated question that requires assumptions on a lot of things that are hard to predict like:

  • What age do I want to stop working?
  • How long do I expect to live?
  • What kind of return on my investments should I expect in retirement?
  • How often do I want to travel?
  • Will, I keep living in my house or sell it?

Fidelity developed a rule of thumb to give you a ballpark of how much you should have saved by now given your age. According to Fidelity, you should have saved:

1x your salary by 30

2x your salary by 35

3x your salary by 40

4x your salary by 45

6x your salary by 50

7x your salary by 55

8x your salary by 60 and’

10x your salary by 67 (which is the age they assume you want to retire)

For example, if you are 40 years old and make $85,000 per year you “should” have $255,000 ($85,000 x 3) saved for retirement.

The Power Of Compounding

The earlier you start saving, the less you need to rely on how much you save each month and the more you rely on compounding returns. If you started investing $204 a month when you were 20 into an investment that returned 7% you would be a millionaire by 65.

The opposite is also true, the later in life you begin saving the more you will rely on how much you save each month and will benefit less from compound interest.

Is This Realistic?

A lot of people in their 20’s and 30’s might find it difficult to put ANY money aside, let alone save up two year's salary by their 35th birthday.

  • Student loans are breaking new records each year
  • Housing prices in many cities have skyrocketed
  • Wages have not been increasing
  • Credit card debt keeps climbing, along with interest rates

If you’re 28, have $100,000 to student loan debt, $10,000 in credit card debt and pay $1,500 a month in rent on a $50,000 salary how are you ever going to be able to save $100,000 in the next seven years?

How To Start Saving At Any Age

First, I am just going to get the lowest hanging fruit out of the way. If your employer provides a 401(k) or some other type of retirement plan, ENROLL IN IT IMMEDIATELY. You should aim to reach the maximum annual amount you are allowed to contribute, but at the very least you need to at least contribute enough to get the full employer match. Many employers match up to around 5% of your salary. So if you make $50,000 you can contribute $250 each month and your employer will contribute an additional $250 on your behalf. This is literally free money. Do not leave it on the table.

We still come back to the question “where am I getting that $250 per month when I can’t even keep up with my bills?”

Be Resourceful And Willing to Sacrifice

Drew from “Guy on F.I.R.E” was able to save $650,000 by age 30 by recognizing and capitalizing on every advantage he had in life. Drew graduated college with $25,000 in debt and landed a good job in commerical real estate. He then took the following actions to quickly building his wealth.

  • Rather than renting an apartment he lived with his parents
  • Rather than buying a car, he rode a bike to work
  • Rather than relying solely on his job, he got several side hustles
  • He used all of these savings to buy a 3 bedroom house. Rather than paying the mortgage himself, he rented out the other 2 bedrooms to cover a portion of his housing costs.
  • Then he bought a second house, a fixer-upper. He rented out the 3 bedrooms in the previous house and he rented out 3 of the 4 bedrooms in his second house once it was fixed up.

Building wealth starts out as a snowball but can eventually build into an avalanche. I imagine it felt like a grind for Drew when he was living at his parent's house, getting up early to do his side hustle before a full day at work. But that duel decision to live at home and cut his rent to $0 and increase his income through side hustles allowed him to start building his savings rate to 80% which was the catalyst for his wealth building.

The lesson here is to take advantage of every opportunity in your life. It might not feel great moving back in with your parents, but if that’s an option available to you take advantage.

If you don’t feel like you have any privileges or advantages in life that you can leverage, be willing to sacrifice. That’s what Jillian Johnsrud did.

  • To escape a toxic situation she emancipated herself in high school.
  • Medical Bills put her $55,000 in debt by 19
  • She, her husband and their five kids moved into a house with several roommates to cut down living expenses.
  • This allowed them to pay down the debt, and build up their savings, which eventually allowed them to buy a “fixer upper”.
  • They lived in the fixed upper while they did the repairs themselves.
  • They eventually bought two rental properties which cover their living expenses.

Most people with five kids would not even entertain the idea of living with roommates. It’s understandable, the idea of strangers living in the same space as your children would make most people very uneasy. But Jillian recognized that to achieve Financial Independence, she would need to make sacrifices.

If you are still saying to yourself, “I can’t come up with $250 a month”, ask yourself if you have leveraged all the advantages you have in life or what sacrifices you might need to consider. If it’s possible for Drew and Jillian and countless others it’s possible for you.

What are some advantages in life (like living with your parents) that you could take advantage of or some sacrifices that you would or would not be willing to make? Let me know in the comments, I would love to discuss.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.