Recent studies have shown that a large percentage of young adults under 35 are declining enrollment in employer-provided retirement plans. Considering the economy, it’s understandable that many young adults are finding it impossible to focus on things any further off than paying student loan debt, purchasing a home or vehicle, and getting started in their careers.
Many won’t be financially able to leave their parents’ home until well into their twenties. Even if they’re interested, today’s young adults find it hard to sacrifice a portion of their often meager wages for retirement savings. Especially if they’re barely getting by as it is.
Considering this trend in the next generation, some companies that employ mostly younger adults aren’t bothering to offer retirement plan options and are choosing instead to pay higher wages. While this may be saving companies money and allowing Generation Y or Millennial adults to channel their money into immediate debt-payoff or other savings goals, it’s not encouraging the younger generations to think about and plan for the future.
Market research shows that those who are actively saving and investing for their retirement are in the 35-65 age bracket. But, according to many financial experts, this is alarmingly late in the game. The obvious dilemma is that young adults need to start saving for retirement as soon as possible — while not floundering under other financial obligations. It’s a challenge, but it can be done.
Here are four retirement tips that young adults can start implementing now.
1. Invest early, no matter how small
Time is on your side. Because of the wonder of compound interest, as little as $200 a month invested in your twenties can build to millions by the time you retire. But realistically, how many young adults in our economy have $200 a month to put into retirement savings?
The recommended allocation for retirement savings is 15% of your income, but this is often an unrealistic number. The key is to stop worrying about percentages and focus on saving something. Even small contributions to a 401K or Roth IRA when you’re young will put you much further ahead. You can always invest more heavily once you’re in a better financial situation.
2. If your employer doesn’t offer a 401K, open an IRA
If your employer offers a 401K, you should undoubtedly participate. Most employers match your contribution, sometimes up to 100%. Investments are before-tax and non-taxable, unless you withdraw them early.
If they don’t offer a 401K, consider opening a Roth IRA. Although investment companies usually require a minimum amount to start an account, many are catching on to the needs of young adults and waving the minimum as long as you agree to regular contributions. Again, the amount isn’t as important as the fact that you’re saving something.
3. Keep your 401K untouched
When you’re strapped for money, it can be tempting to consider your 401K funds as just another savings account to withdraw from in an emergency. But if you do so, you’ll be paying a 10% early withdrawal fee, plus a heavy fee of up to 20% to your employer for income tax. The amount you’ll receive is not worth the amount you’ll lose.
If you change jobs, your new employer might allow you to roll your previous 401K over into theirs. If not, you should open a rollover IRA and transfer the funds to that.
4. Remember that the future is important
Don’t get so caught up in the present that you neglect to plan for the future. This is one of the greatest failings of the two youngest generations. The transition into adulthood and financial independence is becoming more difficult in the present circumstances — but neglecting to plan for the future can result in a lack of financial independence later in life. Don’t be discouraged if you can’t save much right now; saving something is always better than nothing.
Young adults, how have you begun saving for retirement? Any tips?
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Hi. I think that most important thing is not to buy every new thing on the market, like phones, tv’s and other stuff. It’s always quite expensive when you buy brand new and fresh products. After few months many of them are cheaper, even 20-30%. So many young people should keep on buying by the smart way.
I like what you said that because of the wonder of compound interest, as little as $200 a month invested in your twenties can build to millions by the time you retire. My uncle just retired and is looking for the best investment for his retirement money. I will recommend to him to find a retirement coach to get the best advice for his retirement.
Keep in mind that if you change jobs and want to transfer your 401(k) to a Roth IRA this will be a taxable event and any money you move from 401(k) to Roth IRA will be counted as income for you that year. If you transfer your old 401(k) to a Traditional IRA you are only taxed when you withdrawal.
You got my attention when you said that you must consider opening an IRA if your employer does not offer a 401K. As you said, investments are before-tax and non-taxable. This would be a good tip for me because I would like to be prepared when the time comes that I need to retire. It is crucial for me to retire only when I am financially stable. Maybe, I would consider opening an IRA and using gold for my investments to secure my future.
Just in case my last post didn’t go through…
My husband and I are 24 and 25, and have been saving for retirement for a couple of years now. Sometimes $50, sometimes $200/month, always, every month. I work at home for myself, and my husband has a 9-5 with no benefits, so no IRA for either of us. I have a tax savings, and a do-not-touch emergency fund that I heard Suze Orman talking about one night. We’re good at saving money, are frugal, and live to pay off our student loan debt.
Problem is, all of those accounts, including our retirement account, are just a free savings accounts that came with our Wells Fargo checking when we first started college. They probably haven’t earned us a penny in all the years we’ve had them.
My question is: can anyone give me direct advice, and dumb it down for me? Dumb down the Roth IRA for me to “call this number and give them your money”? I don’t want specifics (I’ve got a lot saved, I think, to cover any fees or min reqs). I get that saving it and having it in the right investment account makes you big money for the future, but no one ever says, directly, this is who I use, here’s the link.
Can someone do that for me?
Vanguard has many great funds and their fees are lower than most other mutual fund companies. If you don’t want to spend too much time on managing your Roth IRA, then I would recommend looking at Targeted Date Funds or LifeStyle Funds (Agressive, Morderate, Conservative, etc.).
I like the Roth IRA options for you and your husband not only because you’re so young and have the benefit of time on your side, but in a pinch you could withdraw YOUR CONTRIBUTIONS without penalty.
Good Luck!!!
I love Vanguard too, but I am with Dave Ramsey…they targeted funds play it to “safe”, a word I use cautiously because you are not beating inflation as much as you need to be to be able to retire with dignity.
I agree, I have a Roth IRA with Vanguard and just love them. So far I have my money in a target-date fund and it’s performing very well (watching my retirement savings grow is awesome, so much faster than in a savings account). I’m 28 and don’t bring home a huge paycheck, so I really appreciate that my Roth contributions are made post-tax now (while I’m in a low tax bracket) and will be available to me as tax free income when I retire (presumably in a higher tax bracket). Good luck to you and your husband!
Investing is a complex subject, and any investment may lose value without warning. But it’s a good bet that someone will do well long term by opening a mutual fund account at Vanguard.com and start investing in their LifeStrategy funds. Just remember to stick it out when market becomes volatile and your investment starts going down in value.
Talk to their rep and they will help you transfer the funds over to them.
Thank you for such a direct answer :). I’ll let my husband know, and check out Vanguard. It’s great to have a target to aim for. If anyone has any other reqs, I’ll keep checking back.
Brenda, I second Vanguard. That is who I started with in 2000, and have never looked back.
That being said, I think you should consider paying off your student loan debt.
Consider reading Dave Ramsey’s book, “The Total Money Makeover”. Also, I listen to his podcasts daily. Get out of debt first.
It sure was helpful when you said that the allocation for retirement savings is 15% of your income. As you said, no matter how small your contributions, you must invest early. This is something that I will consider because I want to ensure a secured future when I retire. Since I want a debt-free life, I will be sure to hire a pro that could help me out.
Well I feel one should start investing from the age of 17 or 18. Investing would be a much better option than saving.
Always faster is better.
Today 50 years of Warren Buffett invest https://twitter.com/Maddie_Marshall/status/594260399165280256
Jessica, I appreciate all of the tips you listed on retirement planning and how to start early. Thank you so much for mentioning the importance of planning for the future by saving any money you can. I think it would also be smart to hire a professional retirement planning service for your finances so that you can get ahead.
These are some very good tips and it’s very socially responsible to target these tips to the young lot who have grown up in a culture of easy credit. I think the most important and basic idea is to start saving at the earliest possible age and see the money grow over time. I just read a similar blog post that highlighted the magic of compounding interest in savings account and the article went on to say that the money multiplies pretty quickly over the years.
I wasn’t aware that saving and investing for retirement around ages 35-65 is already late. I just turned 40 and I thought that I at least have two decades left before this stage. Now that I’ve read your article, I think it’s time that I consult an expert and immediately plan ahead for my future.
I can’t agree enough with the importance of early investing. Even if you’re only able to contribute a small amount to your retirement savings each month, that will eventually build to a sizable nest egg.
Absolutely. I’ve been investing for the past 25 years now and it’s certainly paid off. And I’m not even that old yet, so there are many decades of compound growth left to go!
Saving for retirement is an important topic – I agree. However, I would not advice to blame yourself if you think, you’ve started saving too late (Phil). The great thing is the fact that now you have the habit to put aside money for your retirement. The perspective of 3M or 4M after 40 years don’t matter that much IMHO, because we live in the times of change. Just start saving, each month, no matter how much – saving habit is your first step to your financial success 🙂
Invest early. Then leave your 401k untouched. Great advice. I started investing in my 401k seven years ago when I was 22. It is now starting to look like a really decent sum of money! It’s amazing what the time value of money can do.
Remember, you money doubles every 7 years. So if you start when your 18 instead of when you are 25, you can/probably will have twice as much money in retirement. Using the $200 per month example provided in the article, it would be the difference between $2,302,000 vs $1,168,000! Folks, that is a $1,134,000 difference!
I currently have $80,000 invested, and I started at the age of 25. It kills me to think had I started 7 years earlier I would have $160,000. It will kill me even more when I turn 65 and realize I have missed out on $1.68 million dollars. Upon reflection though, I think about those who have not even started at my current age of 38.
Get started early!
Don’t worry too much about not starting earlier. 25 is plenty early to be financial independent at a young enough age!
I’m not worried. I am glad I was worried when I was 25 year’s old though! A friend simply asked, “Do you have a Roth yet?” That got me started on my journey.
Awesome! Time to treat that friend to a lunch or something. 🙂
I took him fishing. Here is the friend.
http://www.highlands-computers.com/about-mr-larsen.html
Fishing is a great way to spend time with someone. You are a nice friend. 🙂
What pie in the sky interest rate did you use to turn $2,400.00 (that is $200.00/month) into millions?
Also, money does not necessarily double in 7 years!!! It all depends on your rate of return on investment.
Hi Ja,
Thanks for inquiring. No, there is no guarantee. But history helps us predict the future. The history says that the stock market has returned 9-10 percent. $200 per month will give you over $1,168,000 in 40 years. I am an optimist though (but not quite an expert;-). I think I can get 12, which pushes my investments into over $2,000,000 in the same 40 years. In fact, I already have reached the 12% mark. If I am half wrong, then I am still happy .
You’re welcome.
Hi
This is a very important topic. We should plan our future right from the day we start earning.
I am 24 years old now, and I have invested in more than 3 fields now. I do not like doing job for someone else. I have planned to invest in few more things recently.
These are all great points, especially #1. I spoke to so many who put off investing in their early years because they felt like $50-100 per month would do nothing. The point is to start and start as soon as possible. I would also add the need to avoid debt – especially consumer debt as much as possible in order to free up more money to invest.
I fully agree, no matter how small, even $20 every two weeks, if that is really all you feel you can spare, will make a huge difference in the end when it comes to savings.