One of the most difficult financial challenges that young adults face is how to start saving for retirement. In comparison to saving for retirement, managing your budget, spending less than you earn, and building up an emergency fund seem like a piece of cake. Retirement planning is a great mystery to so many young adults. Unfortunately, this means delaying or putting off actually investing money for your retirement. Just because it isn’t something you are familiar with, doesn’t mean you should put it off. In fact, if you have read my post on why compound interest matters so much, you probably wouldn’t put it off one more day.
Why Retirement Planning is Difficult for Young Adults
There are two main reasons that retirement planning is difficult for young adults. The first is that young adults do not know how to invest – mainly because they have never had to do it before (unless you were like me, researching stocks when I was in middle school). Heck, many young adults don’t even know what a Roth IRA is or why it’s a great investment for people in their 20s. Investing, for the inexperienced can be quite confusing. Not only are there different types of investments, but different ways to invest in these different investments. Have I confused you yet?
The second reason why young adults do not know how to plan for their retirement is because they are young – they have no idea when they will retire or how much they will need to retire. If you are a math major, it’s like trying to solve an algebra equation without knowing any variables. You can’t solve for X if you don’t know what Y is… Likewise, you can’t know how much you need to retire if 1) you don’t know when you will retire, 2) you don’t how much you will make in your career, or 3) how much you need to live comfortably. There are too many variables and it seems overwhelming. How can anyone plan for retirement when they are this young? If you ask me, it’s no wonder why people in their 20′s hold off investing in their retirement.
An Easy Retirement Plan for People in their 20′s
Despite the uncertainty, all hope is not lost. Young adults can start saving for their retirement even though they do not know when or how they will retire. I’m convinced that the best retirement plan for young adults is to avoid over-analyzing and just start saving. This avoids the failure to start investing because of uncertainty. Just start doing it and you will figure out the specifics later.
Where to Start Investing
Okay, so it’s not THAT simple – but close. In case you haven’t read my article on where someone should start investing, the best way to start investing is an employer 401(k) or 403(b). This is a retirement savings fund that is funded before taxes and is often accompanied with a “match.” This means that for X amount of dollars, your employer will match every dollar that you contribute. This guarantees a large return on your investment and you should take advantage of this before doing anything else. Beyond that, it’s easy to start because your employer gives you all the tools necessary to start investing.
If you still have money to invest, you can either add more money to your initial investment or open a Roth IRA or look at a stocks and shares ISA. Again, this is a great investment for young adults. There is a yearly contribution and you can never go back in time. In other words, if you want to invest a lot more money later, you will be limited how much you can play “catch-up.” There’s no reason to live with regret now, so start saving
Why You Should Start Saving for Retirement NOW
This is ultimately the basic outline of my retirement plan right now. I am maxing out my Roth IRA each and every year in addition to using my employer’s 403(b) account. There are many advantages to this very basic plan. I am investing an aggressive percentage of my income so even if I never make more money in my career, I will have a secure retirement fund for two reasons. First, I will be used to living on less than I earn. Second, because I am investing so early in my career (and so aggressively), compound interest will make sure that my investments grow exponentially.
If you are standing around, waiting to invest for your retirement because of uncertainty, stop waiting! ACT NOW! I highly doubt anyone has ever said that they regretted saving too much money.
Are you saving enough for retirement?