A Simple Retirement Plan That Any 20-Something Can Follow

Retirement planning is often very difficult to perform as a 20-something-year-old. Not only do you not know how much you will end up making in your career, but you also don’t know how much you will need to live on 35-40 years from now. There are too many factors at play to come up with an accurate projection of how much money you will have, will need, and so on. BUT, this does not mean that you should not plan at all.

Unfortunately, very few friends of mine who are in their 20’s are saving for retirement. It’s sad, but a harsh reality. It’s not all because of uncertainty, but if you were to ask me, it plays a huge part. Well, I’m hear to help you. I’ve come up with a simple, yet effective way to save for retirement that almost any 20-something can follow. It takes a little bit of discipline, but it’s not out of most people’s reach.

A Simple Retirement Plan

Are you ready for the master plan? Here it is…

Step 1 – Open a Roth IRA and Max it Out EVERY YEAR

That’s right. The first and most important element of this simple retirement plan is to use a Roth IRA to save for retirement. Right now, you can contribute $5,500 each year into your Roth IRA. If you don’t know what a Roth IRA account is or does, you can read my article on Roth IRA for Young Adults. There are a number of reasons why this is the cornerstone of my simple retirement plan:

  1. $5,500 may sounds like a lot, but it’s only $458.33 each month. Almost anyone can afford this. Of course, I know that not everyone can afford this much when they just get out of college. But, most middle class Americans can cut this much out of unnecessary spending. How many times do you eat out? Or go to the movies? My guess is enough to add up to $458.33 each month.
  2. More importantly, if you average 7% returns on your money for 35 years (age 22 to 57, still early retirement by all means), you will have over $750,000 in your account. This will give you an easy $30,000 of tax-free income each year until you die (assuming a 4% safe withdrawal rate).
  3. A Roth IRA does not require you to work for a corporation with a nice retirement package. This is something that you open on your own initiative. In other words, this is open to everyone, unless you make too much money.
  4. Did I mention that the withdrawals are TAX FREE? That’s right – you never have to pay Uncle Sam another dime as long as you don’t take the money out too early. This is one of the reasons why I love my Roth IRA. In other words, it makes your money more valuable.

Bonus Tip – If you are married, you should strive to save $11,000 between the both of your Roth IRA’s. This will double your retirement nest egg and retirement income. $30,000 might not sound like a lot, but $60,000 isn’t that bad at all. Especially, when you factor in the other parts of my plan.

Step 2 – Buy a Home 5 Years after College

Again, we all know it’s a hard time right after graduating college. But, even the lowest income earners can be resourceful. If you sacrifice your living situation and continue the college life, I would guess that many people could afford to buy a house of their own after 5 years. Why 5 years? Well, because for this simple plan, it would mean that you pay off your 30 year mortgage at age 57. It’s true that $30,000 per year is not going to be a lot 35 years from now (after factoring in inflation). That’s why you will want to avoid paying most of your traditional housing costs.

Bonus Tip – If you are really aggressive, you could even save up another down payment 5-10 years later, but a second home and rent out your first home. Not only will this likely give you a little extra cash each month, but will also give you a nice, stable retirement income.

Step 3 – Supplement with Social Security

The last part of this very basic retirement plan is to supplement your earnings with any social security that you may qualify for. I just did a quick calculation using the Social Security Calculator and someone earning $40,000 per year born in 1985, could start collecting over $1,000 per month at the age of 62 (in today’s dollars). While this may not seem like a lot or guaranteed, you have to remember that this is just extra money.

Recap of the Simple Retirement Plan

This plan wasn’t intended to be a three step plan, but that’s what it became. Here’s a recap of what you can expect in retirement:

  1. $30,000 per year from your nest egg (or $60,000 if you saved twice as much)
  2. 25-40% lower monthly expenses in retirement (housing costs are practically zero)
  3. An additional $12,000 in Social Security benefits. (based on figures above – this will vary)

Again, these are very general and basic calculations, but it’s easy to see how doing just a couple of things can add up to a decent retirement plan.

Is That Enough to Survive On?

I can already hear what many of you will say.

“That’s not enough to live off of! Are you kidding me?!”

While it may not seem like a lot of money, you also have to remember that I am sculpting a plan that is both simple to remember and that most 20-somethings can actually follow. The more aggressive you are in retirement savings/investing, the more money you will have. It’s that simple. But, even if you don’t make a lot of money and lack the intelligence to understand the stock market at a high level, you can still retire with a decent amount of money. The message is really that simple: Anyone can save enough for retirement to survive.

And most of us can afford to do a little more than this – but if you can’t afford to do more than this, this is a great place to start.

Steps to Get Started:

  1. Find $458.33 in your budget that you can start putting towards retirement
  2. Open up a Roth IRA with a well-known investment brokerage. If you want to automate it, try using Betterment. They offer a valuable service for people who don’t know much about investing at very reasonable management fees.
  3. Start saving for a down-payment on a home
  4. Buy a home
  5. Continue to save money
  6. Enjoy Retirement!

Readers, do you think most people can commit to this plan? Do you think they should do more?

4 Responses to A Simple Retirement Plan That Any 20-Something Can Follow

  1. Great advice! I don’t think enough people think about their retirement options. It’s better to start saving for retirement immediately after college, so you don’t even miss the money.

  2. Joanne D says:

    Thanks for the post! I’m saving up to open up a Roth IRA with Fidelity :) But what are your thoughts about employer-sponsored retirement packages? I contribute to my own to take advantage of matching, but do you prefer the Roth IRA instead?

  3. Sarah says:

    Hmmm I think I’m going to have to play devil’s advocate a bit on this one. A few things to consider:

    1) The idea of simultaneously maxing out a Roth IRA and saving for the desired 20% down on a house in your first 5 years after college is probably not realistic for the average American (especially if you’re paying down student loans).

    2) Even if your home is entirely paid off by the time you retire, you will still have to pay property taxes and maintain your home on a regular basis.

    3) Any home you buy in your 20s will probably not be your “forever home.” Chances are you will move into a larger house at some point in your life, especially if you ever get married and have a family, making the goal of retiring mortgage-free a bit more difficult.

    4) With Social Security projected to run out in 2035, it’s unlikely that we will have the same kind of safety net upon retirement that the baby boomers have. I generally leave Social Security out of our retirement calculations entirely. That way, anything we do end up getting will be a bonus!

    5) While I understand your point of a Roth IRA being accessible to anyone regardless of company benefits, I think having a 401K is hugely important to having sufficient retirement savings. After all, you get help from your employer (match) and have a much higher contribution limit ($17,500) during your higher-earning years. Some employers even offer Roth 401Ks which would give you the same tax-free retirement as a Roth IRA.

    My point is that I can’t see many people sticking to this plan right out of college, especially if they’re in debt and/or decide to have kids. Life happens. I also believe that limiting yourself to a Roth IRA will not provide enough savings when accounting for inflation and the uncertain future of Social Security.

    Wow, that was long-winded. Haha. I’m interested in hearing your thoughts. :)

  4. Thomas says:

    This looks like a smooth sail. However, I guess it takes time to get into the financial disciple to allot, read let go, a part of your money into something that you will enjoy about three decades later. It goes against ‘instant gratification’, but we all have to embrace it sooner or later.

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