New guidelines for young retirement savers

For most American workers, the only retirement benefit available to them is a 401(k) plan. This means they bear the responsibility for saving and investing wisely for retirement. They also bear the consequences if they do this poorly. How well you handle the "do-it-yourself" retirement saving system of today and avoid the pitfalls will determine whether you have a secure retirement.

An analysis by Fidelity Investments has come up with a list of savings factors that show how much you should have saved for retirement by the time you reach a certain age. For starters, workers should have saved at least 1 times their annual salary by age 30. So a 30-year old making $70,000 a year should have saved at least $70,000 by that age.   

Here are the savings guidelines specified in Fidelity's report:

Clearly, workers in their 20s need to get started saving for their retirement as soon as possible if they want to be on track by age 30.

But it's hard for workers that young to feel the urgency of saving for retirement. After all, they have a lifetime of working and earning ahead of them. The most common reason this group gives for not saving for retirement is not having extra dollars to put away. The financial pressure of college loans and credit card debt also play a role. No wonder only about 30 percent of younger workers who are eligible to join a 401(k) typically do so.

The first thing to do is to join your company's 401(k) plan as soon as possible -- if it has one. Also find out how much you need to contribute to receive the maximum matching contribution -- if any -- from your employer. Most will require you to contribute at least 6 percent of your pretax pay to get, say, a 3 percent employer match.

But even if a 401(k) plan isn't available, you still have retirement saving options. If you're self-employed, you can establish and contribute to a self-employed 401(k) plan. That allows you to make contributions to your own account as both the employer and employee for a total pretax contribution of $55,000 per year. If you're not self-employed and earn $5,500 or more, you can contribute up to $5,500 to an IRA. 

Make it a point to contribute at least 15 percent of your pay each year into your 401(k) to have a reasonable chance of accumulating the savings you should have by age 30. Here's why: If you're 25, earn $40,000 per year and save 15 percent ($6,000 per year), and your employer adds an additional $1,200 in matching contributions, you could have saved over $43,000 by age 30, if your 401(k) investments grow at a 7 percent annual rate.

A common reason for not saving for retirement is to pay off extra principal on student loans. But by consolidating student loans, you should be able to lock in a low fixed interest rate and extend payment terms, thus lowering your payment -- and making room for retirement savings.

If you can't afford to save 15 percent of your pay now, begin with at least the amount required to receive the maximum employer matching contribution. Then automatically increase your contribution each year, coinciding with any annual pay increase. Some 401(k) plans have a feature called a contribution escalator that automatically raises your share by a defined amount on a preset date. 

Some 401(k) plans include the ability to make Roth-type contributions, which are deducted from your after-tax pay instead of from pretax pay as in a traditional 401(k). The advantage is that all the growth on these contributions is tax-free at retirement when you withdraw the money. This can be a significant benefit to younger workers who'll be investing for a long time. If your plan offers this Roth feature, consider using it.

Finally, make sure to invest your newly started 401(k) plan for maximum growth. This means you should set your investment elections to include at least 80 percent stock funds, with the remainder in a mix of stable value and bond funds. Most employers' plans limit the number of stock and bond fund choices to a dozen or so. But because employers bear the fiduciary responsibility of vetting these funds, most are decent choices. 

You can instead elect to invest all your contributions into a target-date fund, which aims to maximize your returns at a set future date, closer to your actual retirement. These funds are professionally managed and designed to be suitable even for investors with a 40-year time frame until retirement. A target-date fund will start out investing mostly in stocks and will gradually shift to a more conservative allocation over the years as you near retirement. 

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• 401k

Ray Martin

View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.