By Alexandrea Will, Foresters Financial
Planning for retirement in your twenties may seem daunting, especially if you’ve just started working and still have student debt to pay off. You might be thinking, “If I still have over 40 years until retirement, why do I need to start now?”
But your twenties is actually the best time to start planning and saving for retirement because you can harness the power of compound interest!
To better understand the power of compound interest, and the importance of starting to save early, consider the following example:
If you start saving at age 25, and save $2,000 per year for twenty years ($40,000 in total) then by age 65 you will have earned $339,489.1 In this example I’m assuming a 7% annual investment return.1
But if you delay your plan, and don’t start saving until you’re 35 years old, then by age 65 you will only have $172,579. Even though you will have invested the same $40,000.1
Those extra 10 years of compound interest can make a huge difference! The reason for this is that you did not give your money as much time to earn interest.1
So now that you understand the advantage of starting to save in your twenties, the question is how can you develop a successful retirement plan and commit to saving? Here are five easy steps you can start taking in your twenties.
1. Start Early – “Your age is the biggest factor of your financial plan. Use it as leverage.”
If you haven’t started financial planning yet – don’t worry. It’s never too early or too late to put a plan in place, but the earlier you start the easier it will be to build significant wealth in the future.
Many components of financial planning are uncertain. We do not know how the markets will perform, what the tax brackets or tax rates will be, or even how much money you will have to invest in the future. The one factor you can control is when you start investing. Based on history, the longer you hold onto stocks, the greater the chance that you will have a positive return and a higher annual return overall.
2. Educate Yourself – Be careful of paralysis by analysis when looking at the abundance of information online.
These days, you can find a lot of information online, especially about investing. While online research can be helpful in some cases, your financial advisor can be a great resource if you do not know where to start or if you want to confirm the validity of anything you learned online.
Your first meeting with a financial advisor is typically a conversation about you. Your advisor will get to know you, your current financial position and your future goals.
Think of your advisor as an expert you can ask any finance-related question. They will also help you learn about the basics of financial planning, the various investment options for your savings, and they can determine if your budget is working for you.
3. Know Your Budget – Budgeting is never fun, but you need to know what your expenses are so that you can compare them to your income.
An important step to building a successful retirement plan is to figure out how much you are able to contribute. Make a simple budget by listing all your expenses and comparing them to your income. A portion of any money left over can be invested for retirement.
Your financial advisor can help you refine your budget and suggest monthly savings goals based on your unique situation.
4. Build Good Habits – Get a system in place. Any way you can save in a systematic way is the way to go.
Maybe you’re only able to save $100 a month towards retirement right now – or maybe you can only save $25 per month. That’s okay. The most important thing you can do is commit to your monthly savings goal and be consistent.
Work with your financial advisor to set up automatic transfers into a savings or retirement account. This will make it easier to stick to your savings goals because you won’t have to think about transferring money every month. You might not even miss that $100, especially if you’re smart about your spending.
5. Update Your Plan – Build a lifelong, trusting relationship with your advisor.
Retirement planning is an ongoing process. Check-in with your financial advisor on a recurring basis and be sure to update him or her on any changes that affect your financial status.
For example, if you receive a pay raise you may want to consider increasing your monthly contributions to your retirement account or other investment accounts.
Like any skill, financial planning is easier to learn with practice.
It’s also one of the most important things you can do to secure your future. So book an appointment with us today, your future self will appreciate it!