Retirement Planning If You’re Under 30

by Meg Favreau on 5 April 2013 (19 comments)

Hey, you know what sucks? Being under 30.

I’m not saying that from personal experience — I’ll be 30 in myself in just a few months, and I’ve enjoyed my 20s just fine, thank you. But if you read any personal finance news or advice, being a 20-something is apparently the worst — we’re saddled with student loans, burdened by a tepid job market, sinking in quicksandy credit card debt, supposedly spending our money wrong, having trouble getting health insurance, and, oh yeah — supposed to be saving as much as possible for retirement as quickly as possible.

Well, that sounds easy! And fun, too!

The reality is that, while people harp at us to start saving for retirement early, it’s not always possible — or the best financial move. However, there are ways to start putting away for the future now — and not feel like a total miser while you’re doing it.

1. Get a Sense of What You Need to Retire (but Don’t Freak Out)

It’s hard to work towards a goal if you don’t have a concrete idea of exactly what you’re trying to achieve — knowing the specifics of the goal makes it real and enables you to plan the concrete steps you need to take to achieve it.

To get a better picture of your retirement future, take a look at this Retirement Workbook — it can help you better understand your situation and make a specific plan.

Remember, though — don’t get nervous when calculating those numbers. While retirement planning is important, it’s also a long-term project, and not something you need to do all at once. 

2. Deal With the Most Important Things First

Before you start saving for retirement, you should ensure that you have fairly solid financial footing — saving for later in life will do you little good if there are things wreaking havoc with your finances right now.

First, build an emergency fund — $1,000 is a good goal to start with. Most emergency situations — car trouble, unexpected job loss, even a medical bill — can be handled with $1,000. Eventually you want to have at least one month’s worth of expenses saved up. Many experts recommend having three to six month’s worth of expenses saved, and I think that’s a great goal — but I also know from personal experience that it can be VERY hard for someone just starting in their career to even think about having that much money. So don’t worry about that (yet).

After you have a little bit of an emergency fund, focus next on your high-interest debt, such as credit card debt or private student loan debt (which often carries a higher interest rate than federal student loans). These debts can eat up thousands of dollars over the life of the loan, and if you look at the comparatively low interest rates currently available for savings and investments, it makes much more sense to pay off these debts before you put money away for retirement. Our writer Philip Brewer has more thoughts about why it’s better to wait to save.

But you shouldn’t wait forever. Which brings us to…

3. Contribute to Your 401(k)

If you work at a job that offers a 401(k) or a similar plan like a 403(b), you should begin contributing — even if it’s only a tiny amount, and even if you don’t think you’ll be at the job long enough or aren’t old enough to get a matching contribution from your employer.

There are a few reasons why you should do this. First of all, these contributions are taken directly from your paycheck, and since the money is deducted automatically, you probably won’t even realize that it’s gone. Secondly, there’s always the chance that you’ll stay at the job longer than you think — long enough for your company to start matching your contributions, basically giving you free money.

The third reason — and this is the reason why people will harp at you to start saving as soon as possible — is that the sooner you start saving, the longer you have compound interest working in your favor. That’s why it’s the first suggestion in this list of tips for planning your retirement from CNNMoney — saving early can give you a huge boost in the long-term.

Personally, I ignored the 401(k) and 403(b) at my first two jobs, annoyed that they wouldn’t match my contributions until I had been there at least a year — or, in one case, until I turned 25. But I definitely regret that decision — if I had contributed some of my own money, I’d have a much bigger nest egg today.

4. If You Don’t Have Access to a Plan at Work, Open a Traditional IRA or Roth IRA

These two popular retirement savings plans each have their advantages. As the aforementioned CNNMoney article puts it:

…a traditional IRA offers tax-deferred growth, meaning you pay taxes on your investment gains only when you make withdrawals, and, if you qualify, your contributions may be deductible; a Roth IRA, by contrast, doesn't allow for deductible contributions but offers tax-free growth, meaning you owe no tax when you make withdrawals.

Basically, contributing to a traditional IRA can help you pay less (or get more back!) when you file your annual taxes, but you can’t make a withdrawal before retirement age without paying a penalty. With a Roth IRA, you don’t get the same annual tax benefits, but you can make early withdrawls.

For this reason, I think the Roth IRA is especially good for people in their 20s. While I definitely don’t advocate dipping into your retirement savings — what good is it if you don’t actually use it to, uh, save for retirement? — it is nice to know that you can access that money without penalty if you absolutely need to. A couple of years ago, I was in a tough situation where I needed a car — and withdrawing some money from my Roth IRA is ultimately what made it happen.

The key, as with the 401(k), is that you don’t need to contribute a lot — anything can help. Consider saving your change, depositing it at the bank periodically, and putting that in your IRA. Or, if someone buys you a drink or a meal you were expecting to pay for yourself, put that money aside for retirement savings. Put half of your birthday money in the IRA. The important thing is to make these deposits when you can, even if they’re small.

5. Don’t Stress

Retirement planning is one of the most long-term things you will ever do in your life. And, while starting early has huge benefits, the long-term nature also means you have time to be patient, take care of more-pressing financial matters first, and spend your 20s saving for the long-term, yeah — but also having fun.

Are you under 30? Have you started planning for retirement? Share your thoughts in the comments.

This article was made possible by the support and inspiration from Genworth Financial, a S&P 500 insurance company with more than $100 billion in assets. Check out Genworth's Retirement Income Worksheet to plan for the life you want in retirement.

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Guest's picture
C.j.

I'm in my 30s now and I agree it is best to plan your retirement early. I both a 401k through work and my own IRA and I'm glad I do. I planned my retirement at 28 as soon as I landed my first full time job w/ full benefits after having a few part time jobs after graduating college after the economy tanked. The way Social Security is going these days I'm definitely NOT counting on it as my sole source of retirement income. Also with retirement planning, especially with IRAs I think its important not to just look at traditional banks but also credit unions sometimes credit unions can have cheaper fees or IRA packages than the traditional bank

Guest's picture

It's hard to think about the future when you're still working out the present, but the earlier you start is really much better. In a few months I'm actually planning on starting myself a retirement fund.

Guest's picture

Good advice here. I remember a teacher of mine in high school telling all of his students to research and get a Roth IRA. Because I started one so early in life, I'll be reaping the rewards of his advice once he's long gone.

Start retirement investing early, and keep it up!

Thanks for the article!

Guest's picture
Eddie

As a 24 year old who's been contributing to 401k for the past 3 years, it's nice that the contributions are a) automated and b) pre-tax - since the actual impact on the paycheck is much lower.

What's hard is the high-interest private student loans, having the government loans kick in, and managing credit card debt (although I don't have much of that thankfully). I'm already pretty responsible about my spending, so now it's sorting out how to best pay this all off...

Thoughts? One thing I've considered is deferring the government loans just long enough to finish paying off the credit cards (about 8 months - ick), then increasing the payments on the higher interest loan, and beginning to pay off the government ones.

Guest's picture
Guest

The basic strategy is to pay the highest interest loans first, so if you can defer your student loans (which are likely 6.8% or lower) and pay off the credit cards and higher interest loans, do it!

Guest's picture
MechE31

I'm currently 27 and in a relatively stable career. I started working FT at 21 years old. I've definitely made some mistakes, but am currently in a good spot. Currently have about 1 years salary in the retirement with a 75/25 split on 401k/Roth. I recently switched jobs to an employer that doesn't match, but does offer stock options that could very valuable if the company ever goes public. I'm now contributing 16% of my salary split 50/50 between 401k and Roth. My wife works in the school system and has a modest pension but minimal IRA savings.

Mistakes were not partaking in matching offered by the job I had a co-op before starting my career. They would've match 60% of 8%. Next was not rolling over the automatic 401k contribution from that company as well. I was below the minimum balance in the account so they cashed out the account. After that was not contributing to my 401k my 1st year of employment because they didn't match until after that.

I started younger than most and have been able to rectify my mistakes at a young age, but if I had not made those mistakes, I could be even better off.

Guest's picture
Guest

Don't forget about the Saver's Tax Credit as well... up to $1000 deduction! http://www.investopedia.com/articles/retirement/04/031704.asp

Meg Favreau's picture

Good reminder! Thanks!

Guest's picture

Retirement planning has always been a dreaded topic for me, but I have to face it head on. You have helped me realize that it doesn't have to be scary if I look at it in a clear and simple way. I will be moving forward with my retirement plans as soon as I build my emergency fund. Thank you.

Guest's picture

I'm only 21 so saving for retirement seems like a really scary thing, but I have already started a savings account that I don't touch to help get a kick start for my future. It's never too early to start preparation!

Guest's picture
Kyle

I would say "save as much as you possibly can." It's hard to get a handle on how much you'll need to retire or even what sort of lifestyle you'd like to lead, but having extra savings will give you flexibility down the road.

Guest's picture

Starting is the most important thing for young adults. I find so many people put off saving until "i start making more" or "after I pay off student debt." I think no matter what the case, or personal situation, everyone should begin saving, now. No, really. If you are reading this and haven't started saving for retirement (or in general), start now. Open a savings account and put in $100 or whatever you can afford. Place small amounts in each month, as little as $5 or $10 until you can afford to contribute more. Just get in the habit of saving!!

Guest's picture
Bryan

If you are offered a 401k with a match, contribute enough to get the maximum match. After that I would go to a Roth IRA up to the cap. If you reach that, go back to your 401k and contribute what you can.

The early years of saving are very important. The longer your money has to grow the better. I made the mistake of spending my 20s saving for a very large down payment on my house, and now I am playing catch up.

Guest's picture

Given the state of most people under 30, my first advice would be to get out of debt! :)

Guest's picture
Bryan

Agreed! :)

Guest's picture
Chris M

I opened up a roth IRA at the age of 17, I am now 19 and contribute about 30% of my paycheck towards it a month. If I work overtime, i contribute 50% of that income. I am able to contribute so much because I work full time, go to college, but still live with my parents. My dad got his degree in finances so he helped me get a head start. Once the day starts to go in, it will progressivly get a lot more. I checked last week and I made a profit close to $10,000 so a IRA is definately worth it.

Guest's picture
Mere

I have a Roth IRA and have been contributing since I was 24 years old (I'll also be 30 in a few months). I'm currently unemployed, but still contribute monthly, albeit right now I can't max out-perhaps I'll catch up at the end of year if all goes well. My husband has not started a retirement fund, however will receive a pension (he's a teacher) and argues that because he has student loans at an awful interest rate, we should pay those off first (45k at close to 8%, plus 18k to his parents interest free, thank the lord). Thoughts on this??? We do have an emergency fund as well as other savings, and pay extra $$ to principle monthly.

Guest's picture
Guest

I started saving as soon as I got a full time job (24). By time I'm 30 i will have at least as much as my starting salary right out of school saved. I started with 10% in my 401k and then opened a Roth ira, which i funded as much as my other goals and needs allowed. Last year i maxed it out, which was awesome, but this year it's getting sidelined in favor of some necessary expenses and rebuilding some savings. Last year was difficult!

Guest's picture
LL

I really needed to read every word of this. I graduated only a year ago and will be starting my second $32,000-$34000 job in two weeks after completing the last two weeks at my current job. Presently, I am a banker. And it is very difficult for me to digest what I see everyday. There are some elders that have a $70,000-$200,000 in their retirement savings and are living comfortably. And then there are those that have managed to save $10,000 which is commendable, but not enough to live with minimal stress in the latter years of estimated life. I often stress and wonder when I will ever be able to put enough aside to ensure stability later. However, as you pointed out, when jumping in head first and paying a fairly sizeable amount to school loans, car note, rent, among other things, a hefty monthly contribution is not realistic. So thank you. I have a much more realistic and guiltless approach.