Retirement Planning Strategies For Your 20s

It’s logical that the earlier you start planning and saving for retirement, the greater chance you’ll have to accumulate a sizeable nest egg and be able to retire comfortably when you’re ready. For many Americans, their first opportunity to start saving for retirement comes with their first professional job, coming out of either high school or college.

While individuals in their 20s may just be starting out on the career ladder and earning less money than they will later in life, their expenses may also be lower, especially if they are single and have not yet started a family. This can make the 20s an ideal time to start a disciplined, life-long retirement saving and investing plan.

Prioritizing Retirement Planning

Often, the biggest challenge for these young adults is simply making retirement planning a priority. With up to 50 or more years between them and retirement, it can be easy to put retirement saving on the back burner. “I’ve got plenty of time until retirement, and I don’t have much disposable income right now, so I’ll set up a retirement savings plan in a few years,” is the mindset of many 20-somethings.

Unfortunately, however, some don’t get around to saving for retirement until many years later, if at all. By this time, they have lost years during which the power of compounding could have been working for them to build their retirement nest egg — and these are years that can never be recaptured.

For example, suppose an individual starts an IRA at age 22 and has accumulated $5,000 by the time he reaches age 25. Even if he never invests another penny, his account will have grown to $54,787 when he’s 65 if it earns an average of 6 percent per year (compounded monthly).

But suppose he waits 10 years until he’s 32 to start his IRA and accumulates $5,000 by the time he reaches age 35. In the same scenario, his account will have grown to only $30,113 when he’s 65. Notice that the individual saved and invested the same amount of money — but a delay of 10 years getting started cost him more than $24,000.

The “Rule of 72”

This is a mathematical formula that illustrates the power of compounding and how time can work in the favor of long-term savers and investors. The rule states that money approximately doubles in the number of years equal to 72 divided by the return generated. So if you earn 6 percent a year on your savings, your money would double in about 12 years (72 / 6 = 12). Therefore, approximately each decade that is delayed in saving for retirement could cost you the opportunity to double your money.

Given this, individuals in their 20s should make every effort to start saving for retirement as soon as possible. The first step is to participate in employer-sponsored retirement savings plans, or open an Individual Retirement Account. Then commit to making regular contributions to the plan — ideally via a payroll deduction or automatic monthly transfer of funds from a checking account into the plan.

While the initial contribution amounts may be small, contributions can be increased over time as income rises. Starting and following a disciplined retirement saving strategy like this in the 20s can help lay the foundation for a financially secure retirement down the road.

In the next article, we will take a detailed look at retirement planning strategies for individuals in their 30s.