How To Start Planning For Retirement in Your 20s
When you’re just starting out in your career, retirement seems like something too far into the future to really worry about. Just the idea of getting married, buying a house and starting a family already seems like a financial mountain, and much more in your purview. Throw in student loans, and it might seem like you’re just about squeezed from every possible pocket — but that’s not the case.
To set yourself up for the best retirement possible, there’s no time to lose. The longer you wait, the more money comes out of your pocket as opposed to building up in compound interest. Here are some tips to get you started on your retirement planning journey.
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Learn What a Retirement Account Actually Is
Unfortunately, high school and college prepare you for a job, but not one of the most important benefits a job provides — a 401(k) or retirement account.
Retirement accounts are provided special treatment by the government and are the only financial instruments that have any kind of preferential advantage. Why? Because the government is incentivized to have people prepared for retirement so that they are less dependent on them in the future.
Compound interest is perhaps the most important concept to understand for retirement planning in your 20s. This is because even a small amount of money can have a big impact the longer it is invested. Let’s say you invest $1,000 in your first year of working into a 401(k) at 25 years old, and let’s assume a rate of return over 10 years at 7 percent. In 10 years, at 35, this money will double at just over $2,000. Throw in a couple of years of higher returns and a couple of years of increasing contributions as you grow older, and you surpass this easily.
The importance is that even a small amount of money can pay off because you have a luxury most others do not — time.
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Look For Company Matches
Make sure when you’re job hunting that you find a company with matching 401(k) contributions. Especially in your 20s, this maximizes your investment with less of your own risk. Most companies match anywhere between 2%-4%. Let’s say you only put in 4% of your salary when you begin as a small start — that means your company matches 100% of your contribution and it’s as if you are putting double the investment without having to pull from your own salary. It’s free money, and especially in your 20s, the power of compounded interest only takes it that much further.
Set Up Automatic Payments
Setting up automatic payments now will set you up for consistent contributions and the habits you will need in the future to ensure long-term success. An automatic contribution to your retirement account, no matter how small, is one of the best ways to start retirement planning at a stage where compound interest is the name of the game. Building is the focus in this stage, so make sure you get whatever you can invested.
Cover at Least the Fees on Your Retirement Account
All retirement accounts have fees, even if they are half a percent. Make sure you cover at least the amount of the fees so that you have active principal invested and you’re not just paying into the fees of the account. Contributions of 4% of your monthly salary will usually cover you here, but it’s crucial you find out who services your 401(k). Once you know what company your 401(k) is at, like Fidelity or Charles Schwab, set up a call with one of their representatives to walk you through the process of changing investments and to explain their fee structures and who pays them.
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Keep This in Mind
When beginning to plan for your retirement, remember the old adage from investment scion Warren Buffet: “Do not save what is left after spending, spend what is left after saving.” When applying for a job or looking for a new one, consider what your salary will be AFTER 401(k) contributions and budget from there — not just what it will be after taxes.