Retirement Planning in Your 20s

To some of you it might seem crazy to create a publication that talks about retirement planning in your 20s.  Admittedly, to most 20-somethings, retirement is so far away that it occupies very little of their thoughts.  But the reality is that a time will come when these "youngsters" will retire too.

In fact, those of you in your 20s might have some fairly unique qualities that make retirement planning so important including:

• Diminished loyalty to employers, resulting in more frequent job changes and smaller pensions.
• Lower probability that Social Security will still be around in 2040 when you hit your retirement years.

Income in Retirement

Today, we basically have three important tools that the government, or your employer, supplies us with to help you to produce income in retirement.  These tools include pension plans, Social Security and retirement accounts / plans.

For those of you in your 20s, we just mentioned that two of these income producing plans might not be around or nearly as big as you'd expect.  Admittedly, there could be a program that appears to replace Social Security or Social Security itself may actually survive.  But right now you've only got one reliable retirement planning tool to supply you with income during those retirement years - retirement savings accounts.

Time Until Retirement

Enough of the bad news, it's time for some good news.  Perhaps the most powerful factor that workers in their 20s have over those that are nearer their retirement days is time.

You've got 30 to 40 years before retirement and that is a huge advantage over many older workers.  With that much time to save money, the magic of compounding interest is on your side.  To demonstrate the power of time, let's look at two examples created using our retirement savings calculator.

Retirement Savings Example

We've tried to use some pretty reasonable assumptions in this example to demonstrate this point.  The above retirement savings example shows us that even without the benefit of Social Security, a 25 year old would need to place roughly half the amount that a 55 year old would each year into a retirement savings account to reach their retirement income target.

Retirement Savings Accounts

We've mentioned retirement savings accounts several times already in this publication, without explaining exactly what we mean.  If we exclude pensions and Social Security from the retirement picture, that leaves us with only a couple of options.

Employer Sponsored Savings Plans

Even if you job-hop throughout your career and you don't accrue a significant pension anywhere, you can still participate in employer sponsored retirement savings plans such as 401k plans and 403b plans.

The amount you can contribute to each of these plans is relatively generous and often involves an extremely valuable employer match.  If your employer offers such a plan, this is usually your best option.

Individual Retirement Accounts

A second option you have is to fund an Individual Retirement Account such as a Roth IRA or a Traditional IRA.  In fact, for individuals in their 20s, an IRA may be all that you need to fund your retirement savings plans - if you start saving early.  That's because the IRA contribution limits are relatively generous for those of you that can still make 30 to 40 more annual contributions to these types of plans. 

Retirement Planning Strategies in Your 20s

As mentioned, if you're in your 20s then retirement may be so far out there it's hard to imagine that planning is even necessary.  If you went to college, you may be preoccupied with paying off those student loans.  If you're thinking about getting married, then you may be worried about paying for your wedding.  If you just bought a home, then you've got a new mortgage to pay off.

However, the point of this article is that starting slowly at this young age can make a big difference later on.  Even if you can only afford to make a small contribution to an IRA, you'll be thankful later on that you did.

So what exactly are the retirement planning strategies you can adopt while still in your 20s?

1. Create a Dream - Think about the type of home you want to own someday.  Picture yourself in the ideal job.  Use your imagination to feel what it's like to be able to afford the things you value in life.  If you don't have a dream, then you can't make it come true.
2. Run Through The Numbers - Set aside some time to get a feel for the numbers.  Run through some retirement planning scenarios so you can clearly see what it takes to live comfortably in your retirement years.  We've got several retirement calculators that can walk you through that process.
3. Create a Plan - Retirement planning is something you cannot ignore forever.  Today may or may not be the day you want, or need, to start saving for retirement but you can start planning.  Taking that first step is always the hardest because putting money aside for tomorrow may mean that you may be denying yourself today.  If you have a plan, then at least you know how you're going to succeed in meeting your retirement goals.

About the Author - Retirement Planning in Your 20s

Copyright © 2006 - 2007 Money-Zine.com

Retirement Resources on the Web