By Daniel Powell
While many people in their 20's give little thought to retirement, they will eventually have to retire too. What people in their 20's do not realize is that we may have qualities including diminished loyalty to employers and a lower probability that social security will exist when it comes time for us to retire. These factors can lead to frequent job changes and smaller pensions. For those who do not want to work after retirement age, it is extremely important to start saving now. The most common options for those in their 20's wishing to save are private savings or investments and employer-sponsored retirement plans including pensions, 401(k)s, Keogh plans, SEP-IRA's, and Simple IRAs. People in their 20's must remember that their biggest advantage is their age, because they can invest relatively little for a long period and wind up with more that someone who is older who invests a lot for a short period.
As an example, if you were to begin putting away $2,000 a month at 25 years old and earning 8% interest, you would have around $560,000 in 40 years. Even though this seems like a fairly simple concept, many of todays workers born after 1978 pass up the opportunity (about 69%). Even though many students are burdened by paying back students loans and other debt, it is important to not let that debt become an excuse to not save. Also, workers in their 20's have the ability to be a little more risky with their investments since they have more time to make up for possible losses. Most workers ages 18 to 25 typically invest 25 to 35 percent of their retirement funds into bunds, which typically return 5.4%. Unfortunately, this is just ahead of inflation so does not really allow the worker to get ahead that far. While stocks average around 10.4%, many will invest their retirement more stock heavy while they are young to try to get as ahead as possible and reap bigger returns.
Since many people in their 20's are big into the bar scene, it is not unusual for many to go out and spend $100 a weekend or more on alcohol. By not drinking and going out for just one weekend, you could be putting away $100 a month or more toward your retirement. Before knowing exactly how much you want to put away for retirement, one needs to know how much they think they will need. Many advisors agree that you need approximately 80% of your annual working pay to be comfortable. To achieve this, many like going 80/20 for stocks and bonds respectively. This allows a much higher chance for growth while you are young and still leaves time to rebound in the event of a loss. However, for people in their 20's, risk tolerance must be assumed and capital should be invested accordingly.
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Retirement planning for 20-somethings
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