Most of the baby boomers can remember their 20’s like it was yesterday, yeah, that’s how fast time flies. Many people hardly ever think of retirement in the 20’s, yet this is actually the best time to start saving for your retirement. This is because you have time on your side, and compound interest will do wonders on your savings. I know during this period is when you feel like you are on top of the world, and retirement planning is a foreign language. But considering the enormous advantages a person who starts saving in their twenties has over person who delays their retirement to a later date, this is an opportunity of a lifetime. Though you are in your twenties at the moment, it’s never too early to start saving for your sunset years, and as Kathryn Tuggle illustrates in the following article, there are three things a person in their twenties can do to prepare for their retirement.
The word “retirement” often evokes images of rocking chairs and relaxation, but experts say it’s never too early to start thinking about your golden years — even if you’re still into fast cars and dance clubs.
The earlier you start investing for retirement, the longer your money has to mature and grow, and individuals who start saving in their 20s are at a serious advantage over those who wait until middle age. We checked in with financial planners who detailed three things 20-something-year-olds should do to get a jump on life after the workforce.
1. Enroll in Your Employer’s Retirement Plan Now, Especially if They Match
If you are eligible for an employer-sponsored retirement plan, such as a 401(k), start contributing a small amount each pay period, says Danny Payne, certified financial planner at Stout Payne Waner in Redlands, Calif.
There’s rarely a good reason to not contribute to your company retirement plan up to the match, adds H. Jude Boudreaux, founder of Upperline Financial Planning in New Orleans. “It’s bonus money that your company wants to pay you, and a bonus return on your investments.”
If your company offers a Roth IRA, contribute to it, says Boudreaux. Even though you’ll be taxed on contributions to a Roth now, he says the benefit of tax-free growth for 30-40 years will be enormous, not to mention the tax-free withdrawals after age 65.
A little savings goes a long way when time is on your side, says Payne, adding that people who start saving in their 20s are at a real advantage.
“Let’s assume a 25-year-old contributes $100 per month to their employer-provided retirement plan and the employer throws in $100 per month in the form of a match. If the account grows at an 8% average annual rate of return until age 65, they would accumulate $698,000,” says Payne. “If they instead delayed contributing until age 35 under these assumptions, their account would only grow to $298,000.”
2. No Employer-Sponsored Plan? Start Your Own
If your employer doesn’t offer a retirement plan, establish your own traditional IRA or Roth IRA account.
Yes, there are plenty of other financial obligations in your 20s like student loans, rent and car payments, but experts say you can’t afford not to contribute a little toward retirement given the amount of time it will have to compound and bulk up your nest egg. Individuals are allowed to contribute up to $5,000 into an Roth IRA in 2011.
“If you’re setting up a Roth IRA on your own outside of your company plan, investing directly with a fund family like Vanguard can again minimize fees and give you access to some broadly based index funds,” says Boudreaux.
Nicole Covganka, a financial planner at Retirement Planning Group in Chicago, says that Roth IRAs are a great way to save for retirement and not have to worry about taxes down the road.
“You think you pay a lot of taxes now, but chances are you will probably pay more later in life,” says Covganka. “You pay taxes now in your 20s on what is probably a lower tax bracket than what you will be at when you are in your 60s. You can’t go wrong.”
Another benefit to IRAs is that you can withdraw money from them before retirement without any penalty, says Payne. Before retirement, individuals can withdraw their contribution (up to the $5,000 annual limit) at any time for any reason without paying a tax penalty.
3. Focus on Liquidity
Once you have the income needed to sustain your current lifestyle, focus on liquidity, says Michael G. Terrio, investment advisor representative and president of The Terrio Group.
“When it comes to liquid assets, it is much more important that you have a reserve liquid rather than trying to become a millionaire overnight, says Terrio. “This money needs to be available for short-term expected, yet unexpected, events, including car repairs, short-term medical events or potential loss of income. It doesn’t make financial sense to pay 28% [credit card] interest on a car repair when they could have planned for the inevitable.”
Ideally, a 20-something investor will have three to six months of income saved in an easily accessible account. While this may not seem like a specific investment for your golden years, it avoids money being taken out of a retirement account in an emergency that leaves you being hit with hefty penalties.
If money is pulled from a retirement account, there are numerous issues including tax ramifications as well as the money pulled does not have the ability to grow, says Chris Zeches, vice president at Zeches Financial Services in Phoenix.
Covanka says the best place to save liquid assets is the bank. “Have an account close to home at your local bank with some savings in it. In the event of a job loss or emergency you can easily access this money and you will be glad you stocked away some cash.”