If you have just graduated from college or are in your twenties, saving for retirement can seem like an almost ridiculous proposition. After all, that’s decades away, and right now there are so many other financial needs that seem so pressing, such as paying off student loans and credit card debt, saving for a house and trading in the clunker that you drove while you were in school for a better ride. But this is absolutely, positively the most critical time in your life to save for retirement as well. The great thing at your age is you don’t have to save a fortune in order to get a good head start on your nest egg; the important thing is just to start somewhere as soon as you can.
Time to Grow
The most important retirement planning asset that you have in your twenties by far is time. When you have decades to let your savings grow, then you don’t have to save a fortune now in order to get where you need to be by the time you stop working. If you can sock $10,000 away in a retirement plan or account of some sort by the time you’re 27, then you have 40 years for that to grow before you reach your normal retirement age. If that money were to grow at an average rate of 6% until then, then you would retire with almost $103,000. If you were to earn 8% a year on that money, you would have over $217,000 and 10% growth per year would leave you with over $452,000 by age 67. And that’s assuming that no further contributions are ever made!
So How Do I Get Started?
Retirement planning for you at this age is very simple. Start by opening either a Roth IRA or participating in the qualified retirement plan offered by your employer (and make Roth contributions if possible). Roth IRAs and plans are superior to traditional retirement accounts because the money that you take out of them at retirement is tax-free, instead of taxed as ordinary income as with the previous plans. Contributions to Roth plans and accounts are nondeductible, but not having to pay tax on your distributions will more than make up for this the vast majority of the time. At your age, you should be focused exclusively on long-term growth, because you have time to ride out the ups and downs in the markets. Don’t be afraid to put your money into some aggressive investments such as technology or healthcare funds, because over time they are likely to appreciate substantially in price. For more information on saving for retirement, consult your financial advisor.