Retirement planning isn’t just for old people – or even middle aged people. People in their 20s and more generally, young adults, can start saving for retirement too. In fact, young adults can make a larger impact on their retirement income than anyone else can – and that’s because they have one major advantage that older people don’t have: time. By having more time for your investments to increase and earn more interest, young adults can either make or break their retirement plans based on whether they save or don’t save.
My Retirement Blunder – How I Didn’t Start Saving Early Enough
Most young adults are happy to start saving for their retirement by their late 20s, early 30s. Not me. In fact, one of my biggest mistakes when it comes to personal finances is not taking advantage of retirement savings early enough. In fact, I remember talking to my in-laws during this time and telling them that I didn’t need to start saving for retirement yet. Oh, how I was wrong.
My first professional job was working for my university while I was still finishing my undergraduate degree. I was only 21 and had the best job in my life up until that point.
The job came with many perks, which I took advantage of, but I declined the retirement benefits. I was only going to be working there for a short period of time and at the time I thought I would prefer the extra cash in my savings account. What I failed to consider was that my employer offered matching funds up to a certain amount. This was my mistake. Not only did I pass up a large chunk of money in matching funds, but I lost several years of earning interest.
“When Do I Need to Start Saving for Retirement?” – The 1st Wrong Question to Ask
Most young adults ask the same question when they finally get serious about their financial future: When Do I Need to Start Saving for Retirement? This reminds me a lot of my initial approach to retirement. Here’s what my logic was:
How long can I continue to live on all of my income before having to save for retirement? I have a lot of things that I would like to buy now that I am earning some decent money at a real job, so why not put off saving for retirement a couple more years. It’s not that important since I am young, right?
While none of us want to admit to operating on this same logic, it’s what goes on in most of our brains. This question suggests that we would much rather delay saving for retirement than be pro-active and make it easier on ourselves later.
This line of reasoning (to delay saving for retirement) is also based on the faulty logic that it is easier to save later in life. Reality check: It’s NOT easier to save later in life. While you might think it is easier to save when your salary is at its peak later in life, in all actuality, one of the easiest times to save money is when you are just starting out. Here are several reasons why saving money is easiest when you are just starting your career:
- You are used to living on significantly less income
- With the exception of possible student loans, you have very few mandatory expenses as you will later in life.
- Lifestyle flexibility to keep your housing expenses to a minimum by having roommates. This becomes increasingly more difficult with a spouse and children later in life.
Instead of asking yourself when do I need to start saving for retirement, perhaps ask yourself how early can I start saving for retirement AND how much easier will it be to fund my retirement because I started so early?
“How Much Do I Need to Save for Retirement?” – The 2nd Wrong Question to Ask
The other difficult questions that young adults must answer, without adequate experience is to determine how much they need to save. Along the same lines, most young adults want to save the bare minimum. Instead of asking what is the bare minimum that you can save, try asking yourself: what’s the maximum I can save in order to make it easier for myself later in life?
By saving early in life and saving MORE, you can drastically increase the figures that are eligible for the benefits of compound interest. The more money you have in your retirement funds, the more options you have. One option would be to decrease your savings later in life when you need to pay for your children’s college education. Another option would be to retire early. While I could continue on and on, the important thing to consider is the freedom available to you later in life for making retirement a financial priority now.
Investing Tools to Help You Get Started
If you are interested in starting to save for retirement, here are two of my favorite investing tools:
Personal Capital: Need one place to see all of your assets? Personal capital is a free tool that allows investors to link all of their accounts within the same secure platform. There’s never a need to login to individual accounts again.
Readers, when did you start prioritizing saving for retirement? Do you regret not starting earlier?
I started even later than you did. Do I regret it? Yep, it’s probably my biggest regret. We were fortunate that that we didn’t wait TOO late. That’s when we did ask that second question of yours: what’s the maximum I can save?
When my wife and I started out, the lie we told ourselves is we were caught in the double whammy people have when they start: that’s when you earn the least and need the most, because you have nothing. There’s probably a smidgen of truth there, but you’re right when you say: early is the time to get used to living off less.
We were fortunate in that I learned about the economic cycle earlier, so we were able to really use the last recession to do a huge “make-up.” So, we’re retired now and it all worked out OK.
Glad that it worked out for you, William. That’s a great story – sounds like a rare one…
We’re glad, too. 🙂
You’re right about the rare. I want to make it less rare, which is why I started my blog a few months ago.
It’s not rocket science, but it does require awareness and some self control. But the payout can be quite significant…
I opened my IRA about 2-3 months after I started my first full-time job after college. I don’t regret not starting earlier, as the money I made from various short-term or part-time jobs was needed to pay for some living expenses/pocket money in school. I would probably encourage my kids to start as teens, but I’m happy that I started at 22. You’re so right that it’s easiest to save when you don’t have many big fixed expenses yet.
My regret, if anything, is never having a job that offered a 401(k). Once I do have a job like that, I’m going to feel behind, even though I started so young.
I didn’t want to start saving for retirement either, but my dad convinced me to contributed to the 401k. So I started saving as soon as I got my first job. Thanks to my dad, we have a nice nest egg instead of some other consumer products.
Excellent advice, Corey! Like Joe, I was convinced to start early by my dad, and it was the best advice I’ve ever been given. So naturally, I gave the same advice to both my college-age sons – but I discovered that it needed a little bit of a 21st century verbal twist to get them interested. It was changing the word “retirement” to “financial independence.” Retirement made them think of a fixed age of 65, a very long ways away for a young adult – and now that pensions have all but faded away, it’s no longer even part of the equation. But when I put it to them as, “You can have enough financial independence to do whatever you want, and the sooner you start the sooner you can have it” they got much more interested. Full retirement is just one of the many choices you have once you’re achieved financial independence.
I’m 22 and signed up for my 401K as soon as I could. So far so good. My hubby doesn’t have a retirement plan right now so I’m hoping we have so extra cash at the end of the year to open his ROTH IRA for 2012. It’s one of my goals!
I actually wish we could contribute more to retirement which would help significantly with taxes, but right now, I think we have a good balance.
Thanks for your tips. I made some crucial mistakes several years ago when I did fairly well online. Long story short I blew through the money and now I’m back to square 1. No savings, no retirement accounts, nothing. After reading your post I’ve been doing some thinking and plan on taking steps to make saving a reality.
I always feel like I’m poaching reading 20’s finance in my 30’s, but great information. I was in school or residency until I was 26. I didn’t know you could save for retirement until you had a “real” job. I also only started with 3%, which was the match amount. If you’ve never had money, start with a high percent. You’ll never miss it and be glad you did.
I started saving early when I got my first real job at 22 out of college and it has really put me on a good path. The best thing about contributing early is that your contributions matter a lot more than the ups and downs of your account.
For example, If I only have 50k in my retirement account, If I’m able to contribute 10k, my account has gone up 20%. So a 5 or 10% decrease in the market has a lot less of an impact at this point.
I’m 30 and have only recently started saving — I’m VERY behind.
I started alsaving after my first job in NYC after getting my face punched in every day! Knew I couldn’t last, so save I had to.
I thought I could work in finance for 5 years max. Turned out to be 13! I was kind of shooting for 18 years (40 years old), but decided to cut it now after figuring out how to engineer my layoff.
God, I wish more people would read this and realize these mistakes! Time is your greatest friend when you’re young, and yet we squander it! Luckily, I started getting interested in investing early and really learned everything I could about my 401k as soon as I started it. I am grateful I did because I feel like I got a great head start on the game.
I started investing for retirement at age 23. Fortunately I had my dad and uncle stressing to me the importance of it. My wife did not invest a dime until we got married.
This is so true! Compound interest can have a dramatic impact on the size of your retirement fund.
I am nearing 30 and sadly I only really learnt this lesson 4-5 years ago. Imagine how much bigger my retirement fund could have been if i started saving for retirement when I got my first job at 16!
Such a personal tragedy 🙁
I have a 403 b from a teaching job, but I have not contributed to it. I need to open a 401k and just start putting money into it now that everything seems to be settled.
Start saving early is always good, one dollar saved when you are younger is worth much more than one dollar saved when you are older if it is invested correctly.