If you are in your 20s, your retirement probably seems too far away to start worrying about it just yet. However, nothing could be further from the truth. The retirement planning you do while you're young can make a world of difference in your long-term financial health.
With that in mind, here are three tips from our experts for 20-somethings to get started on their own retirement planning.
It's very easy and almost seems a reasonable thing to do for someone in their 20s to ignore retirement planning. After all, when you're 25, you're only about seven years out of high school and perhaps three years out of college. You likely won't retire for some 40 years, so really... what's the rush?
Well, there is urgency to consider, because right now, when you're in your 20s, you're way ahead of those in their 30s, 40s, 50s, and beyond on a key part of successful retirement planning: time. Having 40 years for your money to grow is an extremely powerful situation to be in -- even if you're not yet earning much and can't contribute many dollars to a retirement account. Let's run through some numbers, assuming that you merely sock away $1,000 per year for 40 years. If it grows at the stock market's long-term average annual rate of about 10%, it will grow to... $487,000! That's almost half a million dollars.
Don't stop there, though. Surely you can sock away more than $1,000 per year for most of those 40 years. Ideally, you'll keep increasing how much you save and invest, aiming for at least 10% of your income, but ideally 15% or more. (That might hurt a bit, but consider that it can let you retire early and enjoy life more, while many you know will be worrying about how to pay bills, not to mention how they'll retire comfortably.)
Here's another eye-opener: Imagine someone aged 50, with only 15 years until retirement. To amass that same $487,000, he will have to sock away about $14,000 per year! While you're very young you're in the best position to grow a lot of money relatively easily. Your most powerful dollars are the earliest ones you invest.
I've never met someone who regretted saving more money for retirement. I don't think I ever will.
As simple as the concept may be, it's important to recognize that one of the most important variables for your financial future is how much you save. Basic arithmetic tells us that saving 10% of your income gives you twice the results as saving 5%.
That could be the difference between having $250,000 at retirement, or $500,000. Or living in a cramped apartment or retiring in a beautiful home on the beach.
But that's only half the equation. By living on less, you also reduce the age at which you can retire. After all, you need 20% less money to sustain a $40,000 per year postretirement lifestyle than a $50,000 per year lifestyle. Investing an extra day's wage today could easily save you from a month of work in old age. And that sounds great, doesn't it?
As Selena notes, starting to save for retirement in your 20s can make a huge difference. But even better is the fact that most young adults can get huge benefits from using a Roth IRA for their retirement savings.
Most retirement savers use traditional IRAs because they come with an upfront tax deduction. But most people in their 20s are in relatively low tax brackets, making that deduction worth relatively little. By contrast, opening a Roth forgoes that upfront deduction, but instead you get tax-free treatment when you finally make withdrawals from your Roth during retirement. When you consider the hundreds of thousands of dollars you can accumulate just by saving and investing, the value of making all that money tax free is huge.
Roths are available in two forms. First, many employers offer Roth options in their 401(k) accounts, letting you contribute after-tax dollars to gain that long-term tax-free treatment. Second, Roth IRAs allow you to contribute $5,500 per year, and it's not too late to make a contribution for the 2014 tax year. Even if you can't save that much, though, every dollar you can set aside will means dozens or even hundreds of dollars in retirement that can escape tax entirely in a Roth.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.