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Most people don't start thinking about retirement until they're in their thirties, forties, or even fifties. However, by that time, you're so close to retirement age that it's tough to put enough money away for an early retirement.
Therefore, most financial advisors will tell you that there's no such thing as planning for retirement too early. The younger you are when you start piling up retirement savings, the more likely you are to be able to retire early.
This article will explain how exactly to do that. From what type of retirement accounts you should open to why it's a smart idea to start planning for retirement in your 20s, we'll cover it all. Let's dive in!
Here are a few reasons to consider starting your retirement planning early.
In the United States, you can retire and start collecting Social Security benefits when you turn 62. However, if you wait until you're 67, your benefits will be 30% more than if you start collecting at 62.
Unfortunately, the Social Security Administration also reports that it could start running short on funds by the year 2035. While retirees can still get something from the program, they likely won't withdraw as much money as they put in through the years.
Therefore, it's important that you don't plan to rely on Social Security benefits for your retirement fund because who knows how much will be left by the time you retire!
Retirement accounts work because they build more interest and savings the longer money is deposited in them. In other words, if you put $2,000 into a Roth IRA in your 20s, it will have much more time to exponentially increase as opposed to if you open an account in your forties or fifties.
Even though it might feel like you're drowning in bills right now, trust me, it only gets worse the older you get. Sure, the average 20 to 25-year-old has some bills, such as rent, phone, internet, car insurance, and others.
However, as you get older and start a family, you suddenly have all your old expenses, times two, three, or even four, depending on how many kids you have. Therefore, it's much easier to put extra money away in your twenties when it's just you as opposed to when you're older and have other people to consider.
Lastly, the sooner you start saving for retirement, the earlier you'll be able to retire. If you make the right choices and have the help of a savvy financial advisor, you may be able to retire 10 to 20 years earlier than the average American.
Now that you know why it's a good idea to start planning your retirement early, let's look at how to begin!
First, you should decide at what age you would like to retire. That way, you know how much money you need to put away so that you can retire at your desired age. Even if you're off by a few years, creating a retirement age goal will get the ball rolling and give you a target to shoot for. 0
Once you know your desired retirement age, you'll know how much money you need to invest and save in order to retire when you want to. Then, you can create a budget with early retirement as the overarching goal.
In addition to helping you know how much money you need to put away each month for retirement, creating a budget will also help you track your income and expenses. This will help you know exactly how much money you have available for retirement investments while still paying all your other expenses, such as utilities, rent, phone bills, etc.
With early retirement in mind, you should strive to put at least 20% of your income into retirement savings and investment accounts. However, if that's more than you can afford right now, even $50 to $100 per month is a good start.
For instance, if you put $100 per month into a retirement account starting at age 25 and continuing until you're 65, you will have saved $48,000. And, when you factor in that your investment could gain up to a 6-8% return, you could be looking at more than $250,000!
Wanting to spend money and live it up is perfectly normal. However, if you're serious about building a retirement nest egg, it's important to be smart with your spending. For instance, rather than eating out every night and going on frequent trips, cook at home more often and choose your trips wisely.
This is especially important if you get into a situation where your income suddenly increases. It's going to be extremely tempting to increase your budget as your income increases, but I have a better idea. Rather than using your extra income as spending money, consider it as a bonus for your retirement plan and invest it in your future.
I know what you're thinking. "Why would I create an emergency fund when I could invest that money in a retirement account instead?" While that makes sense to a certain degree, creating an emergency fund should always take precedence over starting a retirement account.
If you start saving for retirement without an emergency fund, you may have to drain your account if you experience unforeseen expenses. In addition to possibly having to pay early withdrawal fees, draining your retirement account puts you right back at square one.
Creating an emergency fund before investing in retirement savings will give you peace of mind and help you stay on track no matter what happens.
In addition to starting your own investment portfolio, you should also take advantage of your 401k if you work for someone who offers it. 401ks are one of the most popular types of retirement accounts, and they offer annual returns of 5-8%. As such, if you're eligible for your company 401k, you should opt-in and start saving.
However, where your 401k investing really pays off is if your company matches your investment. This is actually more common than you might think, as most companies offer an employer match of up to 5% or even 6% of whatever you pay into your 401k.
Whether you have a 401k at work or not, opening a Roth IRA (Individual Retirement Account) is a good idea. Roth IRAs are tax-advantaged retirement accounts, which means you don't have to pay income taxes on any money you put into your account. With non-tax-advantaged accounts, you will need to pay taxes when you withdraw money from your account.
Roth IRAs may also offer better returns than 401ks and other types of retirement accounts. As such, they're a great long-term savings option and a great way to achieve financial independence in retirement.
In addition to putting your money into retirement plans, you can also invest in other things, such as the stock market, mutual funds, or real estate. The more you invest when you're young, the longer you have to accumulate free money as your investments work for you.
Real estate, in particular, is a great way to make money in the short and long term. Whether it's purchasing rental properties, flipping houses, or buying raw land, real estate is one of the few investments that experiences cold spells.
Lastly, the single most important thing you can do to solidify your financial future and start on the path to early retirement is just that—START! The longer you put it off, the harder it is to take those first steps and start the process.
So, once you finish reading this article, I encourage you to take stock of your finances, create a budget, and figure out how much income you can put into retirement savings. Next, get connected with a certified financial planner and let them start investing for retirement on your behalf.
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