Your 20s can be a lot of fun.
You might be traveling, figuring yourself out, maybe even making a mistake or two along
the way.
It happens.
But where you shouldn't be making mistakes is with your finances and saving for retirement.
Wait, hold up thinking about retirement?
In your 20s?
It's not as crazy as it sounds.
Having enough money to live on during retirement will likely be the largest financial goal
of your life.
How big?
In order to live comfortably, experts agree you'll want to live off 80% of your working
salary.
To put that in perspective, if you retire making $75 grand a year, you'd want to live
off $60k annually.
In fact, according to U.S. Census information, the average retirement length is 18 years
$60k times 18 years is $1.08 million.
That's just a rough estimate that doesn't take into account factors like inflation,
taxes, additional investment growth, or living longer than average,
so you could need even more.This may sound daunting, but it's more manageable than
you may think.
You just need to start saving now.
And not just saving, investing.
That's because of something called compound interest and it's powerful.
Compound interest is reinvesting earned interest back into the principal investment.
As you reinvest interest on top of interest, your investments can grow on top of growth
over time.
The idea can be a little abstract so let's look at a quick example.
To achieve growth that builds on growth, you need time and regular contributions.
If you invested $200 per week for 30 years with a 7% rate of return, you'd end up with
$1.12 million, more than the $1.08 million you'd need from our previous example.
Keep in mind, if you're in your 20s and wanted to retire in your 60s, you'd have
40 years, so even more time for growth.
Of that money, only $312 grand would be your own contributions.
The other $700k would be due to compound interest.
Sounds powerful, right?
The takeaway is that in your 20s you have something on your side: time.
You're likely the furthest from retiring you'll ever be, leaving you with more time
to reinvest and able to have your money make money, which can then make more money.
Kind of has a nice ring to it, doesn't it?
With that in mind, here are three things you need to do in your 20s:
establish your financial foundation, participate in a retirement plan, and consider investing
in assets that have a strong track record of growth, like stocks.
The first step in your 20s is to establish your financial foundation stuff you need
to do to get ready to invest.
To do that, you'll want to save up an emergency fund of three to six months' worth of expenses.
This cushion will help keep you from having to raid your retirement savings if your car
breaks down or you find yourself without a job for a few months.
The other part of the foundation is to pay off any high interest debt that's debt
with an interest rate higher than 5%.
Debt with a rate this high would likely grow faster than most investments, so you've
got to take care of it, or your money will never flourish.
It's also a good idea to focus on your career in your 20s, trying to improve your potential
for earnings.
It's tough to save on an entry-level salary, so working on making more will make saving
easier and your retirement goals more obtainable.
Once you get those obstacles out of the way, you can really focus on setting aside 15%
of your income for retirement, which is typically your top investing priority.
If you can't save 15%, you're not alone.
Most Americans contribute less than 10% of their annual salary to their retirement.
15% is a lofty goal, but if you're able to meet that mark, it'll make saving for
retirement that much easier.
A good goal is to have a year's salary saved toward your retirement by age 30.
The second step is deciding where to actually put all that money so it can grow.
There are types of accounts designed specifically for retirement investing that can provide
potential tax benefits, which can help your money grow faster.
For example, 401(k)s and 403(b)s are retirement savings plans offered by some employers.
They allow you to set aside money from your paycheck tax-deferred and invest it.
Of course, distributions during retirement will be subject to ordinary income tax.
Some employers even offer matching contributions, furthering your growth potential.
But what if your employer doesn't offer a retirement plan?
No worries.
IRAs, or Individual Retirement Accounts, are another type of account with similar tax advantages
to 401(k)s.
The third step is determining what to invest your money in.
Stocks can be risky they can and do lose value sometimes.
But with that risk comes the potential for growth.
Just one dollar invested in large stocks in 1926 would have been worth more than $9,000
by the end of 2019, even with some market crashes along the way.
Your 20s are the decade where your tolerance for risk is typically the highest because
you have the most time to recover from a market downturn.
So, an investor in this age range might look to build and maintain a portfolio where 90%
of assets are in stocks and 10% are in something saferť like bonds.
Just make sure you're still seeking diversification.
For example, index funds are a type of investment that allow you to spread your money across
hundreds of stocks or bonds.
If you want to pick individual stocks, make sure you're looking at different sectors,
company sizes, and countries in other words, don't put all your eggs in one basket.
Of course, make sure the ratio of stocks to bonds is in line with your own risk tolerance.
The 90 to 10 ratio is not necessarily going to be appropriate for everyone in their 20s.
To recap, your 20s are meant to be enjoyed but be sure you're also setting yourself
up for the future.
Establish a solid financial foundation by creating an emergency fund and paying off
any high-interest debt you have.
Also, make sure you're taking advantage of the power of compounding by enrolling in
some kind of retirement plan.
And finally, seek growth-orientated investments while you're still young enough to recover
in the event of a downturn.
Taking steps now can help you set yourself up for a comfortable retirement.
Trust me, your 65-year-old-self will thank you.
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