I often use my friends as a small sampling for informal financial surveys. It usually happens sitting in front of a sports game, relaxing, and I try to introduce a financial topic. “That was a nice shot – Say…how’s the job going?” when I want to learn more about young adults’ employment aspirations. “You still paying off your massive student loans…?” when I want to learn more about student loans. I think I’m quite subtle, but in reality, I’m sure my friends see through my “subtleties” – especially now that I am talking about it on my blog.
While my friends’ actions are great for providing me inspiration and support for some of my thoughts about young adults and money, I have found recently that it is their INACTION that provides more material for me.
A recent trend from my informal surveys is that many young adults are not preparing for retirement, despite the huge advantage that young adults have. There are a number of different reasons for this inaction, including: not earning enough income, too much debt, not understanding the benefits, AND…
not knowing HOW to prepare for retirement.
Everyone’s situation is different, but if you are wanting to get ahead while you are young, here’s a list of moves you can make while in your twenties.
Most Important Retirement Moves While You’re Young
Get a Good Job
Graduating college with a four-year degree used to guarantee a great job. Those days are long gone. I’ve seen many of my college-graduate friends struggle to get a decent-paying job. I faced these struggles myself, but to a lesser extent. I graduated with a degree in the humanities field, which did not easily translate to a occupation. Instead, I used other skills and experience to advance.
It took me 3 years to accept what I would consider a decent-paying job, but I did it. I’m confident that this will be one of the most important steps to help me prepare for retirement. Not only will it mean a higher salary ten years from now, but more money to contribute to retirement accounts.
Learn how to invest
Having more money from a higher-paying job is the first step, but only the first step. After all, no matter how much you earn, if you do not invest properly or at all, you could lose money (either through bad investments or slowly due to inflation). Learning some of the basics for investing is the next step to preparing for retirement.
Take Advantage of Employer Retirement Accounts
If you secure a decent job, odds are that you will have the option to enroll in an employer-sponsored retirement plan. This can be one of the best vehicles to not only force yourself to save for retirement, but also take advantage of the tax benefits. This is, of course, not to mention the likely match by your employer.
Open up a Roth IRA
Other than using the employer-sponsored retirement account, you should also look into opening (and maxing out) a Roth IRA. If you are married, you should do this for both of you, unless you make too much money to qualify. Review the comprehensive Roth IRA guide for more details on the benefits. Using the Roth IRA to sock away money won’t help you with taxes now, but it will in retirement since all distributions are tax-free.
Pay off your debt
One of the best things you can do while in your 20s is to get rid of your debt. Whether it’s consumer debt or student loans, it will hinder your future flexibility and ability to save for retirement. Paying off your debt while you’re young provides you guaranteed returns and focusing on your debt can be great practice for saving a significant portion of your money. There’s no better time to form good habits than when you are young.
Control your spending
You can earn all of the money in the world and take advantage of certain retirement accounts, but if you do not know how to control your spending, none of that will matter. Start by creating a budget that is realistic and work towards keeping to that budget for an entire year. One you can accomplish this, you’re well on your way to a secure retirement.
Get Life Insurance
While it’s important to master the basics (spending, saving, investing, taxes, etc.), it’s also important to prepare for everything, including life insurance. I know what you’re thinking – “I’m young, I don’t need life insurance!” But, I would argue that getting life insurance while you are young can be a huge savings. Not only are you healthier in your 20s than any other age, thereby lowering your premiums, but it will also protect those who love you. Retirement isn’t just about setting yourself up for success, but your entire family. I got life insurance from Northwestern Mutual, but there are a lot of companies that offer life insurance.
Preparing for retirement while in your 20s is not an exact science – so you shouldn’t stress too much about following a precise path. Instead, it is more important to develop positive habits and start moving in the right direction. You will have plenty of time to make adjustments and figure out the details as you get closer to retirement.
Corey, curious to know where your obsession with retirement is coming from in your 20s? I think it’s good you are thinking about retirement early on, I’m just curious on the mental aspect of it. Was there something that happened at work or in your life that makes you want to retire?
I started daydreaming of retiring after about four years of working on Wall ST., where the industry regularly kicks our butts.
Great list! I have already started to make those moves since I want to be able to retire early, though I do not plan to stop earning after retirement.
Great points. I’m 25 and have a good amount of money to invest but haven’t done anything with it. I’m trying to learn more about investing and what my best options are.
Under your “Learn how to invest” topic I would suggest that new investors read “The Bogleheads’ Guide to Investing” book, and that they also look at the Bogleheads.org Wiki. In particular, the Wiki entry, Getting Started, has a lot of great advice and links to articles on low-cost passive index fund investing.
I’ve managed to start working on most of these points. My retirement and debt payments are balanced so I can make contributions and tackle my debt in a decent time frame. The only one left is life insurance. I haven’t opted to get my own policy because my employer offers a small plan. It’s not much but it would easily cover my outstanding student loans and any funeral related expenses.
Great points to consider Corey! I made little effort to plan for retirement in my early 20s. I caught the bug though closer to 30 and haven’t stopped focusing on it since. The sooner one starts the better.
I think I have done most of those things. I’m working on paying off my debt right now – still have that pesky student loan hanging around. It should be gone in a year, maybe a year and a half at most 🙂
Great advice EVERY 20 year old should read.
I think I was too oblivious in my early 20’s. Thankfully, I didn’t make too many bad decisions and am not in a horrible financial position. I am, at the least, able to start building wealth still in my 20’s.
I believe budgeting is the biggest problem for those in their 20’s. Sticking with the budget too obviously. If some money is budgeted for the fun of ones 20’s, I believe the 20’s can be a “magical” time while also building for the future when you’re not out until 2 am drinking 3 nights per week.
Great advice here Corey!
Hi Corey, just wanted to shoot you a message and say how great this is. Your advice is spot on and very helpful for young professionals. It’s sad to hear about my friends who don’t look towards the future. Do some people plan to work until the day they die?
I certainly agree with you, getting a job and learning how to invest early in low charge index funds can give you a head start in life. Personally if I could go back to my 20’s I would save 80% of all my money and live with my parents until I was married which would probably be at 35. By the time I was 35 I would want a fully paid house, no debt, and huge savings. Great post, Thanks for sharing.