You may need to save 40% of your paycheck to retire by 65, expert says — but don't panic


Most financial experts would applaud you for putting away the recommended 10%-15% of your income each year for retirement.

Unfortunately, even 15% may not add up to nearly enough by age 65 if you're a millennial or a member of Gen Z. Younger savers may need to set aside as much as 40% of their income if they hope to retire comfortably and on time, Olivia Mitchell, a professor and executive director of Wharton's Pension Research Council at the University of Pennsylvania, recently told CNBC Make It.

That can seem alarming, especially since so many young people already struggle to save. A recent survey from credit card comparison site Finty reveals that 24% of the millennials polled say they're doing absolutely nothing to prepare for retirement, and 44% say they have less than $500 in total savings.

Why younger people may need to save more for retirement

"Most people are not told by financial advisors that their future returns will likely be much lower than in the past, and their future taxes will likely be much higher," Mitchell told Make It.

Over the past century, the S&P 500 has returned an average of 10% each year. That, in large part, has fueled the growth of investment portfolios and retirement savings. But experts predict that's going to slow down. Andrew Sheets, chief cross-asset strategist at Morgan Stanley, recently told CNBC that investors should only expect average returns of 4.1% over the next decade.

Mitchell says that taxes are likely to go up, too. The Social Security system is in a precarious position, and the budget deficit is increasing rapidly as well. Addressing those issues will probably, at some point, involve tax increases.

Most people are not told by financial advisors that their future returns will likely be much lower than in the past, and their future taxes will likely be much higher.
Olivia Mitchell
Professor, the Wharton School

Other experts agree with Mitchell. "I don't think she's wrong," says Justin Halverson, a financial advisor at Great Waters Financial in Minnesota. Halverson says that "with forward-looking valuations, it doesn't seem likely" that saving only 15% for retirement will cut it in the future.

That said, getting anxious isn't helpful — or necessary. "People get nervous when they hear these big numbers," says Jacqui Kearns, the chief brand officer at New Jersey-based Affinity Federal Credit Union, like a 40% savings rate. Instead of worrying, though, she suggests you focus on what you want out of retirement and work toward those goals.

How you can increase your savings rate

The idea of saving so much of your income can be paralyzing, particularly if you're struggling to make ends meet. But by taking small steps, you can get much closer to your savings and retirement goals.

If you haven't started putting money away for retirement, start now. Kearns recommends that you make a budget to figure out how much you can afford to save and invest. Even a little is better than nothing.

Consider finding additional income streams. That may mean taking on a second job or side hustle. You can also start laying the groundwork to ask for a raise or find a new job, which can increase your salary and help you save more.

How 'stillness' can bring financial success

Resist lifestyle creep. When you start earning more, it's tempting to start spending more. If you can avoid that, though, you can put yourself in a great position: One where you're able to live below your means and build wealth for the future.

Use the tools you have available to you. If your employer offers a 401(k) or other savings or investing plan, opt in. Some people are reluctant to sign up for employer-sponsored plans, often because they find it confusing. But these powerful tools can supercharge your savings.

"You really need to be thoughtful," Kearns says, "about using the tools your employer provides." That means signing up and contributing, or else you could miss out on extra contributions from your employer and the gains from compound interest. And make the process automatic if you can so you don't even have to think about it.

Remember that time is on your side. Halverson says it's important to keep in mind that as people get older, they generally earn more money. So, if you're unable to save much in your 20s or 30s, you may be able to make up for it in your 40s and 50s. But as you get older, your financial obligations tend to grow (mortgages, children, etc.) along with your income. Keep that in mind if you hope to rely on a catch-up strategy with your savings.

Financial professionals also recommend that you do what you can to ignore the markets, too. You're investing for the long-term, and the day-to-day fluctuations of the market shouldn't inspire emotional, knee-jerk reactions. Instead, take a hands-off approach to your portfolio, checking in every once in a while to rebalance or reallocate your investments.

"You have to think about the long term," says Kearns. "The market is always in your favor long term."

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