Healthy Retirement 101: What to Do in Your 20s
College is a few years behind you, and you’re working and feeling pretty good about your future. It may be difficult to stretch your mind to a time 40-plus years ahead — a time when you may not feel so eager to go into work every day. The good news is that you don’t have to do a whole lot in your 20s to plan for retirement time. At this point, even a little bit of prudent saving and investing can go a long way.
You’ve Got a Lot of Time
Start setting money aside now and time will take care of the rest. After you start working and saving, your money probably has at least 40 years to grow. If you place your savings in the proper vehicle for growth and it grows at the rate of even 8 percent a year, this will amount to a far better cushion after 40 years than if you don’t start investing until your 30s. The 8 percent you earn the first year will kick off 8 percent of its own the year after that. “The sooner you invest, the sooner the magic of compounding will help you achieve your goals,” says John Bartucci, a certified financial planner with Lincoln Investment Planning in Wyncote, Pennsylvania.
Pay Yourself First
Avoid spending money on non-essentials. “Pay yourself first,” advises John Risley, president of L.O. Thomas and Company, an investment firm in Linwood, NJ. “It’s admittedly difficult to save when you’re first starting out because you’re probably not earning up to your potential yet. But put some money aside every month and stick with it.” This doesn’t mean you should pay your retirement fund before you pay your rent, but you’ll want to do it before you splurge on that Jamaican vacation — or even on eating lunch out five days a week. With certain retirement accounts like IRAs, you can often arrange with your bank to make automatic contributions every time your paycheck is deposited. This reduces the temptation to spend the money elsewhere.
Decide How Much to Set Aside
Decide how much of your paycheck you’re going to part with to finance your lifestyle 40 years or so down the road. Because you have a lot of working years ahead of you, you can start small, according to Forbes — even 10 percent of your earnings will do it. Apply the percentage to all the money you earn, not just your salary — if you receive a $3,000 year-end bonus, drop an extra $300 into your retirement savings. You might want to graduate your contributions over time, maybe increasing the 10 percent to 11 or even 13 percent after a year or as you get more established financially. “The average rate of inflation is 3 percent,” Risley says. “If you don’t increase by about that much every year, you’re going backward.”
Decide How You’re Going to Invest
Invest wisely — if you just leave your money in a run-of-the-mill savings account, it’s not going to finance your old age. But if you put it into a Roth IRA, these are after-tax dollars. You already paid taxes on the money when you earned it, so you don’t have to do it again when you retire and take the money back. If you invest in a 401(k) through your employer, these contributions are made with pre-tax dollars, so you’ll end up owing the Internal Revenue Service later. The upside to this is that less of your annual income is taxed if you invest this way, lowering your current yearly tax bill. This might result in a little more money in your pocket at a time when you’re just starting out and need the extra cash. You’re not limited to these types of investments, however. Your 20s might be the perfect time to get aggressive and take a few risks, because you have plenty of time to recover if you lose on an investment or two. Consider stocks, exchange-traded funds or mutual funds. Stocks can plunge anytime the economy goes south, but they average returns of about 10 percent a year over time, according to personal finance website Bankrate.
Make Your Job Count
Take retirement benefits into account when you’re comparing job offers. Employers usually match your contributions to 401(k)s, but not always in the same percentages as you pay in. One job might only match 1 percent while the other offers 3 percent. That additional 2 percent can make a big difference over many years. You might even consider taking a job that pays slightly less salary-wise if that employer is willing to chip in more to your 401(k). Contribute as much of your own earnings as your company will match. If this doesn’t come to 10 percent of your salary, consider placing the rest of your savings elsewhere.
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