To be honest, there is a lot I wish I knew about retirement in my 20s. I had no idea how to much I needed or how to invest for my retirement. It was so overwhelming that it made me question if I was even knowledgeable enough to make these big decisions. The truth was, that I still had a lot to learn about retirement. But now that I am out of my 20s, I want to share what I’ve learned.
I never realized how big of an achievement it is to put money aside for your future self. In your 20s, you’re literally living between a rock and a hard place. Because the money you do have is being sucked up by debt and the rest is being gobbled up by the high cost of living. Secondly, we have to figure out how much we need to set aside for retirement so that we can have enough to survive. Hey, I am all about making sacrifices. But when it comes to the financial advice that’s thrown out there, they tend to forget the human element. This makes the youth spectacle about retirement, especially after seeing a failing retirement system.
There are Problems with Retirement
So, this jumps right into the problems that I am seeing with retirement. To be honest, I see a lot of value in being able to stop working one day and actually relax. But my problem with retirement is how the holes in the system are just being ignored. People tend to forget that we’re the same generation that is being told to forget about social security, it won’t be there for you. We also heard of the short-lived golden days of pensions, while we’re experiencing the crashing employer-sponsored retirement system. So how do we find value in a system that doesn’t show a lot of promise?
We need to look at the benefits we get out of the deal. Like what other retirement options do we have and what else can I invest in? These are the moving pieces they tell us not to worry about, while they charge us high fees and offer no functional advice. I also find it quite confusing on how they limit how much you can contribute to a self funded retirement plan. Especailly, if you don’t recieve a company-sponsored plan. They’re assuming that $6,000 is enough to push towards retirement and aren’t considering our income or situation at all. It doesn’t positon us with a lot of options if you don’t run your own business or get a sponsored retirement plan. These are some of the problems is what I wish I knew about retirement in my 20s, instead of blindly following the one-step retirement path.
ROTH it up and ROLL it over
A big move that happened in 1997 that benefited me in my 20’s was the introduction of the ROTH retirement account. The Roth IRA and the Roth 401(k) option allows you to contribute money you already paid taxes on and invest it. Once you’re at the age of retirement you can sell the investment tax-free and enjoy an insane amount of growth. I learned about this in school and at first, it sounded too good to be true, but it’s true. Roth retirement accounts are the modern facelift the retirement system needs to help us stretch our dollars in the future.
Now, Roth IRAs do have income limits for single and couples that do change each year. This is something you have to look out for each year. But when it comes to Roth 401(k) you have the flexibility of not having an income limit, which is a big opportunity.
Roll Over your Roth 401(k)
When it came to the 401(k) Roth option at work, this is something I jumped on. I was able to contribute after-tax money to my Roth portion of my 401(k) while my boss contributed to the traditional portion of my 401(k). The one thing I wish I did sooner was to roll my 401(k) into my own Roth IRA and IRA after quitting. I took my time which costs me the lost potential of gains in the stock market. The beauty of having your own retirement accounts outside of a job is that you have more flexibility in what you’re investing in. When you leave your money in your employer’s retirement account, you don’t have a say so on the investments. It’s whatever investments they give you to choose from, which is a drawback in my eyes.
The truth is that retirement is changing and depending on an employer is something that’s currently disappearing. This is when self-funding your own retirement comes into play with an independent Roth retirement account (Roth IRA). The benefits of self-funding your own retirement are that you’re taking back control of your future. You’re doing this by investing your after-tax dollars and receiving tax-free growth. A big benefit a lot of people don’t know about Roth IRAs is that they offer a lot more flexibility compared to other retirement accounts. You can access these funds, which I don’t recommend, but you do have the option too. Meaning you can pull the money after 5 years of having the account for education, to buy a home, or even for an emergency. These options are game-changers because usually, the IRS will charge you an arm and a leg to even access your own money.
401(k) Match is FREE Money – Talk to Reps for advice
A 401(k) match is literally you getting a 100% return on your money. If your company does offer you a 401(k) or 403(b) with a match please please take the free money. But only up to the match. Like I said above, the investment limitations on company-sponsored retirement plans are very limiting. Your better off self-funding your Roth IRA with any extra money to get tax-free growth and better investments. Now the next thing you want to do once you know your company is offering you a 401(k) match is to call the company representing the account. Your company is actually paying them to help you pick and manage your investments. Please don’t let intimidation keep you from growing and investing your money, call the advisor.
The 10% Rule Doesn’t Work Anymore
I’m probably crushing all of the myths you’ve heard about retirement, but these are the tips I wish I would have known in my 20s. So one, times have changed! The 10% rule, of investing 10% of your income for retirement is not realistic any more. You have to look at the amount you’re projected to need during retirement to get a better estimate of how much you need to invest. Here are a few things you have to seriously think about in order to create a real game plan for your retirement. This is an investment that needs a strategy, and consulting with a financial advisor for a personal strategy is worth it.
Okay, here are a few tips to help you get to your retirement number:
- How do you see yourself in retirement? Living with family? Old Folks Home? In the Dominican Republic?
- What budget line items will you have in retirement? A home mortgage? Debt?
- Will your current income be enough during retirement? Too high or too low?
- Consider using the 25X your needed income as a baseline for your retirement number.
- Work backward and use a retirement calculator to estimate how much you need to invest.
Understand the Different Types of Investments
I personally know how hard it is to pick investments for your retirement accounts. When I got my first 401k, I had to pick out of a list of 30ish investment. I understood the investments, but it was still overwhelming to pick the investments that will get you to retirement. I literally had to remind myself that I was young and could take some risk. So I decided to invest mostly in S&P 500 growth fund, with a little bit of real estate and international funds to mix it up. To gain the confidence you need to pick your investments it’s important to understand the options you have.
A lot of people want a simple solution to retirement investing and target-date funds are just that. It’s a mutual fund that is based on the year you’ll retire. The investments are aggressively invested in your youth and become safer as you get closer to retirement. That means your investments will keep moving out of stock index funds and into bonds as you age. This is a great option for someone who doesn’t want to be too involved with their retirement investments. One tip when looking up target-date funds is that each financial company names them a little differently. You will see that Fidelity uses the term Freedom Fund while other companies like Vanguard say target-date funds. Keep your eye peeled for this, plus the fees.
You will see the term index fund thrown everywhere when doing research on retirement investments. To keep it simple, an index fund pretty much just follows a group of investments like the S&P 500. When you invest in an index fund, you’re tracking the investment moves of the S&P 500 without having to pay a ridiculous amount to own the S&P 500. People love this because it’s cheaper than investing in expensive stocks, it has low fees, and it’s easy to manage. With Index funds, many jump into these investments with the mindset of not beating the market, but keeping up with the market. Making the main reason people recommend using index funds for retirement investing is that it’s a safe bet.
The abbreviation of ETFs stands for exchange-traded funds. This is an upgraded mutual fund, that allows you to buy and sell in real-time. Unlike regular mutual funds that only allow you to buy or sell at the end of the day. ETFs are, in my opinion, my preferred investment because of this flexibility. A popular investment mix for ETFs is industry-specific investment mixes like Tech, Healthcare, Real Estate, and Consumer Spending. This allows you to jump into specific industries without all the risk of having to buy one individual stock while getting some diversification.
Put Your Retirement on Autopilot
Once you have set a budget for your retirement contribution and have picked your investments. Then you should highly consider automating it if and only if you are in a good financial position. I would recommend doing this if you’re on a good path with budgeting, managing your debt, and can stick to a contribution amount. In your 20’s I know how hard it is to contribute to your retirement and pay off debt, crush goals, and make ends meet. To make sure you stay committed to your retirement contributions, make sure you get on a budget and delegate your money proportionately. Then you will be in a good position to put your retirement contributions and investments on autopilot.
Compound Interest Absolutely is REAL
The amazing truth about investments is that compound interest is real. You invest a little now and 20-40 years later the compound growth of that investment growth will amaze you. A great way to compound your investment is to set all your dividends to be reinvested automatically. This small move will help your dividend income grow into more shares that will hence, produce more dividend income. These two steps of continuously investing and reinvesting your dividends will grow your retirement accounts dramatically. To see how your retirement will grow, check out this retirement calculator, and see how compound interest will benefit you.
I want you to know that starting your retirement in your 20s is a big accomplishment on its own. Yes, it’s overwhelming to learn about investments and talking about how much money you’ll need in retirement. But it’s important to start as early as possible and to get informed about investing in general, even if it’s intimidating. The best thing you can do is to continue doing research on google, youtube, and reach out to a financial advisor. This is what I wish I knew about retirement in my 20s. Hopefully, these tips aren’t super generic and you find value as you fund your retirement.