11/20/2013 11:45 PM ET|
10 retirement moves for your 20s
Sure, you have decades to save. But this is the time to adopt financial habits that determine a successful retirement (and you don't want to miss out on the magic of compound interest).
In your 20s, you're probably graduating from college, settling into a career and making some major life decisions. While you're thinking about who to marry, where to live and which career to choose, don't put your retirement on the back burner.
Sure, you have plenty of time to save for retirement -- probably 40 years or more. But this decade is when you'll build the financial habits that will carry you through to a wonderful retirement. With that in mind, here are some retirement moves to consider now to begin building those crucial financial habits.
1. Get a grip on compound interest. Understanding the power of compound interest can give you more motivation to save early and often. For example, let's assume you start putting $416 per month ($5,000 a year) in a tax-deferred retirement account that earns an average of 8 percent per year. Save for 40 years, and you'll amass $1.3 million.
Save for 35 years, and you'll end up with around $861,500 in your retirement account. Save for just 30 years (which is how much time you'll have if you wait until your 30s to begin saving), and you'll have just $566,416 in savings at retirement. Save early, save often.
2. Pay yourself first. This old adage is crucial to savings success, especially when you're in your 20s. One excellent option is to open a 401k through your employer. Have a set dollar amount or percentage of your paycheck sent straight to your retirement account every payday. You'll start a savings habit, and you'll never even miss the money that never hits your checking account.
3. Control your spending. The less you spend, the more you can save. That doesn't mean you need to live like a pauper, but it does mean that you should get in the habit of spending less money than you bring in each month. This may mean making some changes to how your spend money, although not necessarily. There are plenty of painless ways to save money. But when you look at the advantages of spending less than you earn, you'll see that the sacrifices are well worth your while.
4. Stay educated. You're never too old to learn something new. When it comes to retirement, it's better to educate yourself about your options now. While you can afford to take more risks in your 20s, major financial and retirement savings blunders now could put a serious ding in your long-term retirement savings.
Make it a point to learn about retirement savings options, your investment portfolio and other essential financial information. Then you can begin making decisions now that will boost your retirement savings for life.
5. Kick debt to the curb. Non-mortgage debt is one of the biggest retirement obstacles for Americans of all ages. Paying yourself first is difficult to do when you're struggling to pay for all of your credit card, student loan and car debt. One excellent retirement move is to knock out debt as soon as you possibly can. Your 20s are a great time to focus on this step (or to avoid the debt in the first place).
6. Meet smaller financial goals. Financial discipline is like a muscle -- the more you use it, the stronger it gets. Meeting small financial goals is a great way to practice your financial discipline while rewarding yourself along the way. So make a habit of setting small financial goals, especially savings goals.
Whether you're saving for a new car, vacation or wedding dress, that feeling of sweet success when you meet your savings goal will spur on your long-term retirement savings goals.
7. Max out employer-match benefits. If you're lucky enough to be employed with a company that offers matching retirement savings benefits, take advantage. These matching benefits are basically free money, and taking advantage of them now will seriously boost your retirement savings in the long term.
Even if you have to brown-bag your lunches and skip out on club nights to max out employer-match benefits, you should do it.
8. Boost your contributions each year. Increasing your retirement contributions is easier than you might think. For tax-deferred accounts, keep in mind that each dollar of additional contribution will only cost you about $0.70, depending on your tax bracket. And one easy approach is to use a portion of your pay raise or bonus each year to boost your contributions.
9. Diversify early. Early in your retirement-savings journey, you can afford to take on more risk with your retirement portfolio. But that doesn't mean you should invest 100 percent of your retirement savings in stocks. Diversifying your portfolio now can make a big difference in your savings outcomes over the next several decades.
10. Make a habit of financial organization. You may be the most slovenly of slobs when it comes to your laundry and all those Starbucks cups in the backseat of your car. But when it comes to your finances, you can't afford to be disorganized.
Luckily, organizing your finances doesn't have to be complicated or time-consuming. Just find a simple system for organizing both digital and hard copies of financial information -- tax returns, paycheck stubs, receipts, etc. -- and make that system a habit. You may be surprised at how much time, hassle and money this can save you.
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1) Pay off your debts as fast as you possibly can. If this means living in a crappy studio apartment and eating ramen everyday for a couple of years, do it. If you want to buy a car, get a reliable beater. Forget about buying a house until your debts are paid off.
2) Once you are out of debt, stay out of debt. The only exception to this rule is a vehicle and a house. If you want to get a nicer car, buy used and be able to pay it off in a year or 2.
3) If you are going to stay in the same spot for at least 10 years, buy a house, preferably with at least a little bit of usable land. An acre is good, 5 acres is better. Take the amount you are pre-approved for and cut it in half - that's how much you should spend on a house. Come to the table with at least 20% down and make a couple of extra mortgage payments every year. If you're going to be transferred or relocate every 5 years, forget about buying a house and rent instead.
4) Develop multiple revenue streams. Do contract work. Start a business on the side. Invest in a business as a silent partner. Raise chickens, breed dogs or grow apples. Create websites. Buy and sell antiques. Acquire rental property. Sell something that generates residual income. Learn to play the currency markets or trade stocks. Do whatever you can to generate income from multiple sources.
5) Grow these multiple revenue streams to the point that they generate enough consistent and reliable cash flow to replace your current income.
6) Make as much as you can. Save as much as you can. Give away as much as you can.
7) Retire!- the sooner, the better. Be sure you understand that "retirement" doesn't necessarily mean you stop working, it just means having the freedom to do what you want to do, when you want to do it.
Don't be foolish and fall into the trap of trying to measure your wealth by the value of your assets. Markets change. Valuations fluctuate. Instead, measure your wealth by the amount of cash flow your assets consistently generate.
11. Establish an emergency account and keep it ONLY for emergencies.
Why? This will help you to never, never borrow, take contribution 'holidays', or withdraw from your retirement
12. Insure your health and property and always have disability insurance.
Why? These things will help you weather catastrophic events and will help you to escape hardship withdrawals
13. Always remember - if you think it's a pain in the rear to get up and go to work every day - day in and day out...think how you might feel having to do the same at 60, 65 or 70.
14. Picture yourself 35-40 years from now, thankful that your younger self cared enough to prepare...for, maybe, an early retirement.
Remember, no one is going to care more about you and your future than the person staring back from the mirror. It can be done - with discipline, determination and much less painfully with vast amounts of time.
Find me that 8% return they are talking about. More smoke and mirrors.
I did all of these things when I was in my 20s. By the time I was 30, nearly all of the $50,000+ I put in had been systematically stolen through the system via the stock market crash. It never recovered and it's still about 25k short of what I put in myself.
This time, I put the money into my own businesses and put the growth of it into my own hands.
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