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

The youngest generation in the workforce may have a thing or two to teach everybody about saving money. Nearly one in five workers born from 1981 to 1997, aka millennials, is saving more than 15% of his or her salary for retirement, according to an analysis of 13 million 401(k) plan participants in plans record kept by Fidelity.1

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

Young super savers contribute about $7,300 per year on average to their workplace savings plan. That’s $5,000 more than non-super savers, and super savers have account balances that are three times higher.

That's pretty impressive for a generation that largely just started working. Generation X, composed of workers who are ages 36 to 51, isn't that much further ahead in terms of current savings rates—29% of Generation X saves more than 15% for retirement.

1. Get involved with your savings.

Most of the young super savers, 80%, proactively enrolled in their 401(k) plan, compared with 20% of millennials who are not super savers. Most non-super savers waited to be automatically enrolled in their plans.

Actively taking steps to start saving is a great beginning. That's because starting early can make such a big difference in the long run.

2. Sign up for auto-increases.

Super savers and regular savers were equally likely to be enrolled in the auto-increase option in their 401(k) plan. The auto-escalation feature, as it's called, notifies your employer to increase your deferral amount each year, with no further effort required from you. Of course, you should always thoroughly review your investment plan at regular intervals. But with this feature, your employer will increase your 401(k) plan 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 a little bit more can add up over time.

Hypothetical examples assume that the individual begins saving an extra 1% at the specified age, which could increase along with assumed increases related to pay raises of 1.5% real growth annually until age 67. The rate of return is 5.5% and consists of 3.0% real return and 2.5% inflation. These illustrations assume that the savings rate stays constant throughout the person’s working career. Estimated increases in retirement monthly income are in constant 2015 dollars. It is assumed that upon retirement, the real (inflation-adjusted) dollar amount is withdrawn annually through age 93, and that the person took no loans or hardship withdrawals from his or her workplace plan. All dollars shown (including increases to monthly retirement paycheck) are pretax dollars. Upon distribution, applicable federal, state, and local taxes are due. No federal, state, or local taxes; inflation; or account fees or expenses have been considered. If they had been, returns and monthly increases would be lower. Yearly retirement income numbers are rounded for simplicity.

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

Don't worry if you can't swing the full 15%, which includes any contributions from your employer to your 401(k). Take advantage of the auto-escalation feature in your 401(k)—if you have one—or take matters into your own hands by 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.

Follow our 50/15/5 rule of thumb to keep your spending and saving on track. Try to spend no more than 50% 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 expenses, such as unexpected car repairs or replacing an appliance.

Be sure to save for an emergency as well. Work toward saving up at least enough money to cover three to six months' worth of expenses.

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

Super savers may have a natural affinity for saving and investing—in our study of 401(k) plan participants, super savers were more likely to be do-it-yourselfers when it comes to their investments than were non-super savers. More than half the super savers built their own portfolio from the ground up with mutual funds and ETFs chosen specifically for their investment strategy, compared with nearly a third of the non-super savers. That could be because so many non-super savers were auto-enrolled in their retirement plan and stayed invested in the default investment options. But you don't need to pick your own investments to be a successful investor. If you don't have the skill, will, or time, you can invest in a target date fund or managed account, where 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 workplace retirement plan such as 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 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. 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.

Consider a health savings account. If your employer offers a health savings account (HSA) option with a high-deductible insurance plan—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 When HSAs were offered, super savers were three times more likely to save in an HSA.

6. Struggling to save? Don't be afraid to ask questions.

If you are lucky enough to have a workplace retirement plan, take advantage of the educational resources that may be available.

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, keep investing, and watch expenses along the way, you’ll be on track to live the life you want in retirement.

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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.
Investing involves risk, including risk of loss.
1. According to an analysis by Fidelity Investments of 13 million participants in 401(k) plans record-kept by Fidelity. Analysis was done in August 2015 and again in December 31, 2015.
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.
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