Saving secrets from young super savers

Young super savers do things a little differently from other savers. Here are some of their secrets.

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Think you're saving enough for retirement? Some young people might be out-saving you. Nearly one in five workers born from 1981 to 1997, aka millennials, saves more than 15% of his or her salary for retirement, according to a 2016 analysis of 14.5 million 401(k) plan participants in plans managed by Fidelity.1

Call them the super savers. Their savings accomplishments are notable for two reasons: Saving 15% of income from age 25 on, puts them on track to maintain their current lifestyle in retirement, and 15% is more than most people their age—or even older—manage to save for retirement.

Just 27% of Generation X, ages 37 to 52, saves more than 15% of income in their workplace retirement account, and only 37% of baby boomers, ages 52 to 71, saves that much. Want to be a super saver? Here's how.

1. Get involved with your savings.

If your company offers a 401(k), 403(b), or other retirement savings plan, begin contributing as soon as you can—particularly if your employer offers a match on part of your contribution. Taking steps to start saving is a great beginning, no matter how much or how little you're able to save at first. That's because starting early can make a big difference in the long run.

2. Sign up to increase 401(k) contributions automatically

Many employers offer to increase your contribution automatically each year. Once you sign up to boost your contribution, your employer will increase the amount taken out of your paycheck by the amount you specify.

Of course, you should always review your 401(k) regularly and check to ensure that you're saving as much as you can. But with this feature, your employer will increase your 401(k) contribution by the amount you choose, usually on a yearly basis. The choice is typically presented as a percentage of your income or as a dollar amount.

You don't have to increase your contributions dramatically—saving just a little bit more each year can add up over time.

3. Aim to save at least 15% every year.

Saving 15% of your pretax salary may seem like a lot. But, if you have a 401(k) or other workplace retirement account with an employer match or profit sharing, that contribution from your employer counts toward your annual savings rate. To get to 15%, or to save even more, consider increasing your retirement savings with every raise. If you happen to get some extra money as a gift or inheritance, consider saving a portion for retirement.

Consider following our 50/15/5 rule of thumb to keep your spending and saving on track. Aim to spend no more than 50% of your take-home pay on essential expenses, including housing, utilities, food, transportation, and debt payments. Put 15% of your pretax income toward retirement savings. Then save 5% of your take-home pay for short-term emergency expenses, such as unexpected car repairs or replacing an appliance. Work toward saving up at least enough money to cover three to six months' worth of your essential expenses.

4. Learn how to invest, at least a little.

Just putting your savings into cash may not be enough to help you reach your goals. Investing can help your money grow and can help it to compound more quickly over time. Compounding is what happens when your investment earns a return, and then the gains on your initial investment begin to earn returns of their own.

You probably already know that investing is important, but figuring out how to actually do it can be challenging. It doesn't have to be so complicated though.

Consider building a mix of investments based on easy-to-understand principles of investing known as asset allocation and diversification. Consider using mutual funds or exchange-traded funds (ETFs) to put your plan into motion. You can use actively managed funds or index funds—or combine the best of each, by including both in your portfolio.

If you don't want to pick individual investments, there are options for investors who want a little more help. If that sounds like you, consider a target date fund or managed account, where investment professionals set the investment mix based on a specific retirement age and other factors, like your financial situation and your tolerance for the market's ups and downs.

5. Save in tax-advantaged accounts.

Maybe you don't have a 401(k) or 403(b). You still have options:

Consider saving in an IRA. IRAs allow your retirement savings to grow tax deferred or tax free, depending on your tax situation and the type of account you choose. Assuming you met the income-eligibility requirements, a traditional IRA would give you a tax deduction when you file taxes for the year in which the contribution was made—and then you only pay taxes when you take the money out in retirement. You’ll be required to begin taking withdrawals at age 70½. Or look at the Roth IRA, which may give you a little more flexibility. There's no immediate tax deduction, but withdrawals after age 59½ are tax free, and you're never required to take the money out of the account.

If you're self-employed, consider saving in tax-advantaged accounts designed for small business owners and freelancers.

Consider a health savings account. If your employer offers a high-deductible health plan, you may have access to a health savings account (HSA) option—or if you have purchased a high-deductible health plan on your own, consider an HSA. Here's the gist: All withdrawals are tax free at the federal level when used for qualified medical expenses.2

6. Stick to it.

If you consistently feel as though you just don't have any money to save, or aren't saving as much as you would like, take a close look at expenses. There may be some areas where you could cut your spending in order to increase savings and pay off debt, if that's an issue for you. Sometimes short-term spending sacrifices are worth it if your finances will come out ahead in the long run.

Finally, be confident. You have time on your side. If you keep saving and investing, you'll be on track to live the life you want in retirement.

Take the next step

Use this tool to give your budget a check-up and see if you're a super saver.

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1. Fidelity analysis of 22,100 corporate DC plans (including advisor-sold DC) and 14.5 M participants as of 12/31/2016.
2. The information provided herein is general in nature. It is not intended, nor should it be construed, as legal or tax advice. Because the administration of an HSA is a taxpayer responsibility, you are strongly encouraged to consult your tax adviser before opening an HSA. You are also encouraged to review information available from the Internal Revenue Service (IRS) for taxpayers, which can be found on the IRS website, You can find IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, and IRS Publication 502, Medical and Dental Expenses, online, or you can call the IRS to request a copy of each at 800-829-3676.

Investing involves risk, including risk of loss.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.
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