Plan in your 20s and Benefit in Retirement

by Sean Bryant on September 23, 2016

Plan in your 20s and Benefit in Retirement

It is easy to fall into a trap in your early 20s after years of studying to treat yourself to some of the things you couldn’t buy as a student. With a regular pay check coming in every month and credit fairly easy to obtain those setting out on a career can be forgiven for ignoring the fact that there may be significant calls on that pay check. They may be student loans obviously and often students have helped subsidize their student lifestyle with a credit card. Balances are so easy to develop when card companies simply require a minimum payment on the monthly statement. Pay that and the terms and conditions for use are satisfied.

When it comes to finance some clearly don’t think they need to plan, certainly in the 20s when retirement is so remote yet anyone reading the consumer finance pages will have surely read about the state of consumer finances? Few people have made proper provisions for their retirement and credit card debt is a serious cause for concern.

Don’t Delay

It seems that too few are saving for the future. Those in middle age who haven’t started to do so could be in real trouble in the future. Those in their 20s can avoid all the problems they should have heard about of pensioners with insufficient money and plenty 40 and upwards without any significant savings. The potential problems that this generation faces can be avoided by the 20 and 30 year olds yet too many are finding excuses not to save quite yet.

The chances of receiving a financial windfall are remote yet a survey by the Insured Retirement Institute and the Center for Generational Kinetics found that a significant number believe it is possible. It is hardly a rational strategy and a third of this younger age group are not saving at all. A figure of over two thirds seem to feel that if they have $36,000 index linked to when they retire they will have enough. The truth is that current retirees are spending on average $10,000 more than that. There are two messages here straightaway. $36,000 a year is far more than the Social Security System can possibly provide and hence the need to start saving. Secondly the amount to save is clearly being underestimated.

Retirement Plans

This young generation is not a uniform group. However there are those who feel it is almost unfashionable to save. Well the minimum everyone should have in place is a 401(k) which ensures that employers will contribute up to a maximum amount as long as they save themselves.

Compound interest is such a powerful tool if given the chance. If you save $2,500 a year from 25 to 35 and then stop the balance with standard average growth will be $300,000. If you begin at 35 and save for 30 years until 65 you will have $270,000 despite have put three times as much money in. If you have started at 25 and continue at $2,500 a year until 65 the pot will be almost $600,000, three times as much as you have put aside.

Where your employer doesn’t offer a 401(k) you need to act for yourself. You are allowed to put up to $5,500 a year into your personal plan, an IRA, and although it is not as good as a 401(k) it is something. In any event the absence of a 401(k) is not a valid excuse for doing nothing.

There are other calls on the monthly pay check but that does not mean that retirement savings should not go down the list of priorities. If you get into the habit of saving then you are likely to keep on doing it. You should not put off saving for some lame excuse. Because before you know it you will be ten years older and you have still done nothing. Even a small amount in your early career saved regularly will make a tremendous difference. However you create a surplus to save is up to you. Perhaps actually borrow; get an online loan at a far cheaper interest rate than your credit card company charges you. Your finances will be in better shape and you can enlist compound interest that much sooner.

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Sean Bryant

Sean Bryant created in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and he wife are avid world travelers. He enjoys spending time with his daughter Colette and dog Charlie.

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