Young adults struggle with retirement planning – as they should. For a recent college graduate, there way too many variables to accurately predict their retirement costs. Some people attempt to simplify the calculations by saying to use a percentage of your income, but we all know that doesn’t work (and if you don’t click on that link to learn more). Others use other rules of thumb like having 25 times your current expenses in savings (which is the same as the 4% safe withdrawal rate).

While these are great starting points, they don’t cover everything. There are too many variables, especially for young adults. Who knows what healthcare costs will look like in 30 years, or what inflation will do, or the return from the stock market, or your employment status.

save enough for retirement

If trying to get your first job is like trying to get a hit in baseball, ensuring that you are saving enough for retirement while you’re in your 20s is like hitting a home run at your first at bat. In other words, it’s difficult – but not impossible. Luckily for you, I have several proven patterns that you can follow (assuming you are financially able) to make sure you are saving enough.

How to Save ENOUGH for Retirement

There are many different ways of preparing for retirement. Several different investing vehicles and/or income sources that can prepare you for retirement. Here are some of the most trusted ways of saving enough for retirement.

Contribute to Your Employer’s Retirement Plan

This has slowly become one of my favorite ways of saving for retirement. At my old job, I had a pretty awesome benefit from my employer. It was a required plan, where at minimum, I was forced to put in approximately 3% of my salary. In return, they more than doubled their contribution (contributing 8% of my salary). While I was only there a little over a year (after being eligible for the plan) and had a very low salary, I walked away with several thousand dollars. Which, left alone to grow in a tax-deferred account for approximately 35 years, this small amount could very well cover one year of expenses in retirement.

My wife’s employer offers a retirement plan offering a 3% match. For every dollar she puts in, up to 3%, they also put in a dollar. It’s a pretty sweet deal. Not only does this lower our current tax burden, but it increases her compensation (just by being responsible). We’ve been contributing to this plan aggressively for a year and a half, and we are excited about the progress. The best part, in my mind, is that it’s very easy to invest. It’s automatically deducted from her paycheck so we never see the money. And this makes all the difference. For our other retirement accounts, I personally have to make the decision to set money aside. I usually do, but it’s an extra step and there’s always the possibility of me not thinking it is that important (like if I get too excited about our progress of saving a down payment for a home).

While any contribution to your employer’s plan is better than nothing, the best way to ensure that you are saving enough for retirement is by maxing out your 401k each and every year as soon as possible. The limit for 2014 is $17,500 – which is no small feat for the middle class. If you wait too long, you’ll get used to having that money and it will be too hard to make the change later. We haven’t gotten to the point where we are able to max out Mrs. 20s’ employer plan, but we are doing more than just the minimum amount to get the full match. I suspect in 3-4 years, we’ll be able to afford to max it out, but this will depend on future raises and our home situation (because saving extra money towards a down payment limits our retirement savings).

Max Out a Roth IRA

This is another one of my favorite methods to prepare for retirement primarily because of the flexibility that it offers retirees in tax planning (since all of the withdrawals are tax-free, penalty free in retirement). Of course this means you are essentially saving more (since you are paying tax on this money now), but I’m okay with that if it sets me up for future flexibility and ultimately success. The current maximum is $5,500. A single person starting a Roth IRA at age 25, contributing $5500 each and every year until age 60, would have approximately $900,000 (assuming a 7% annual return). If you are married and double your contributions, you can double the expected amount at age 60. Not too shabby if you ask me. You will also be able to increase the maximum by at least $1,000 once you are old enough (age 50 or older).

Own a Home

Last, but not least, is to own a home. While there are some areas of the country where it is better financially to rent than own a home, most of the time it is going to be better to own a home than rent. The primary reason, at least in my eyes, that you should look to purchase a home is the significantly lower expenses in retirement (or after you pay off your mortgage).

For example, let’s say that you buy an expensive home with a $1,000 monthly payment (excluding taxes, insurance, maintenance, etc.). You pay this amount for 30 years until your mortgage is paid off. Year 31, your annual expenses are then reduced by $12,000. Not bad at all! This is often one of the ways that people are able to retire early. If you buy a home at an early age or pay off your home early, you can own a mortgage-free home in your mid-50s very easily. Sometimes that extra decrease in expenses from the lack of mortgage is enough to make the numbers work and allow you to quit the nine to five a few years earlier.

While these are three ways to save enough for retirement, done alone each will likely fall short (unless you are maxing out your 401k each and every year for 30+ years). The best thing to do is approach it as doing as much as you possibly can to set yourself up for future success. That’s what we are doing and I plan to do even more once we are able to buy our own home.