How To Save For Retirement When You Have No Clue Where To Start

If you’re a young adult like me who is more fluent in procrastination than in finances, saving for retirement may seem like decades away. “That’s a problem for Future Me,” I sometimes find myself saying. And even if you are a financial whiz who has their life together, the process of saving for retirement may still feel confusing and scary, like a monster that’s going to pop out of your very adult button-up filled closet. But the truth is that with an early start, the right steps, expert help, and some planning in advance, saving for retirement doesn’t have to be that scary at all. No one will be able to convince me that growing old isn’t terrifying, but I don’t think it would be so bad if I had enough money in the bank to go hard in my retirement home. 

So, you’re still wondering, “How do I save for retirement when I don’t know where to start?” John Davila, wealth advisor and owner of TWG Wealth Planning, has step-by-step instructions to guide you on how to get started. Retirement planning is by no means one-size-fits-all; there are a few key pieces of information that everyone should know.

The earlier you can start, the better

You know that saving for retirement is something of the future, but when should you actually start thinking about it? Davila’s answer keeps it simple: “As early as possible,” he says. With the magic of compound interest, your retirement savings will grow exponentially the longer they live in the bank. “The more time you have, the more time money has to work for you,” he explains. 

There’s no doubt that the earlier you can start saving for retirement, the better. But the real question becomes, how do you know when you can start saving? Davila says that it’s about your expenses, income, and monthly cash flow. To calculate how much you can afford to start saving for retirement, consider your monthly cash flow in comparison to your total expenses and see how much money is remaining.

“For example,” Davila says, “if you make $5,000 a month, and your total expenses are $3,000 a month, we have $2,000 that we can make discretionary choices with.” Whether you choose to put some of that away for retirement or spend it all is up to you. “It’s not necessarily about limiting what you're doing today, it's just making choices based upon what options you have,” Davila explains.

Establish your goals

My immediate follow up question, when Davila suggested asking myself what my goals were, “How would I know what my goals are?” Which, he kindly understood, explaining that, “For somebody who's younger like yourself, you don't know what retirement means. It's so far out there and so abstract.” And, he’s right. There are so many unknowns of the future and what I may need to be saving for — Will I be paying rent in the city or the suburbs? Sending two or three kids to college? Will I be financially independent or sharing these expenses with a partner? 

Instead of trying to answer these questions, Davila says, “I would start with either a number or a percentage, so you can say, ‘I don't know where life is going to take me, but if I put this away, I'm going to have some financial security that’s independent of anything else.’” To start, he explains that you could set a goal of $100,000, for example. From there, you can adjust your goal based on how life progresses, with the knowledge that saving the first $100,000 is always the hardest part. “Once you get to 100,000, compound interest just takes over, because 7% of $10,000 is 700 bucks, but 7% On $300,000 is $21,000.”

Create a budget

Before putting away some of your extra cash flow into a retirement fund, curate a budget — whether on your own or with the help of a financial advisor — to figure out how much you can afford to be saving. This number and budget will vary person-to-person, but I asked Davila how big of a chunk might be put away as a rule of thumb. 

For someone like me who's just getting started, he advises kicking it off at 10%. So, if my cash flow was $5,000 a month, $500 would be locked away to never see the light of day—or my Starbucks addiction—until my retirement days. However, this number hopefully won't stay at 10% forever, and once you gain more traction, Davila advises that you aim for a lucky 20%.

“The golden egg, if you will, seems to be 20%,” he says. “20% almost makes you bulletproof. As the last year has taught us, life has many stresses. But financial stresses would not be one of them if you were saving 20%.”

Determine your risk profile and investment strategy

When determining how to save for retirement, you must figure out what level of risk you’re comfortable with. For the most part, saving won’t be the same thing as just placing extra money in the piggy bank (to my surprise), but it will involve some form of investing. It’s up to you to decide how risky you’d like to be, but there are some factors you could consider to help formulate this decision.

“A lot of times when people save for retirement, they do it within a 401k, so they're limited to mutual funds,” Davila explains. A 401k retirement plan is through an employer, which tends to give less freedom in regards to investments and go towards a less risky route like mutual funds. On the flip side, Davila says, “We have a lot of younger clients that are very comfortable using individual stocks,” which would be a more risky form of investing.

Age is a key determinant of how risky experts may advise you to be when curating your retirement savings plan. The general suggestion is to be more risky when you’re young (another great reason to get started saving early), and more conservative as you get older. This is because when you’re younger, you have more time to recover, but there’s less incentive to risky investments if you’re closer to retirement and have a good savings pot. However, aside from age, determining how risky you want to be can truly be a personality choice and how you like to play the game.

The most important piece of advice Davila gives to all young investors? “Be disciplined, and don’t panic when the market goes down.” When the market drops, some people’s first instinct is to panic, take their money out, and liquidate it. “But particularly for younger investors, you're not using the money tomorrow for retirement. You're going to use it down the road,” Davila explains. So, you have the ability to be patient and wait out the run-up when the markets improve.

Choose a retirement plan

For the most part, you’ll look to your employer-provided retirement plan to determine how to move forward. When doing so, Davila reminds us to pay careful attention to if they match your contributions—meaning that your employer matches the amount of money that you place in your retirement account as a benefit—which is basically “ free money that's going into your retirement account,” as Davila puts it.

If you’re investigating plans outside of an employer, Davila has his own professional suggestions: “I'm of the opinion that if you can do a Roth IRA,” he says, “it’s one of the best things that you can do for your future.” In a Roth IRA, you only pay taxes on the money when it’s going into the account, and if it sits in the account until you’re 59-and-a-half-years-old, you don’t have to pay taxes on it when taking the money out. 

As taxes rise and years pass, you could be saving your future self big bucks. While I used to be accustomed to the mantra, “That’s a problem for Future Me,” there’s something quite empowering about doing her a favor and setting myself up for success. The idea of saving for retirement no longer has to feel like a chore or a looming pressure, but rather, a way to take control of my future and see value in every stage of my life.