If you're in your 20s, one of the last things you're probably planning for is retirement. Studies show this is true. According to the National Institute on Retirement Security, roughly 66% of people between the ages of 21 and 32 have a whopping zero in retirement savings. Zero, zilch, nada.
With the Social Security program struggling and most pensions now extinct, there are a lot of young folks out there who will be in a lot of financial trouble down the road if they don't completely focus on relying on themselves. So what should you do? Start saving ASAP. Read on to find out how to save for retirement in your 20s and some of the biggest hurdles you'll need to overcome.
Why Don't People Save For Retirement In Their 20s?
It's become more difficult for people in their 20s to save for the future. Of course it's hard to save for retirement if you have shopping addiction for clothes, electronics, or even cars. That can negatively impact how to save for retirement in your 20s and for decades beyond. But why are Millennials specifically not saving for retirement today? There are four main reasons:
- Overwhelming amounts of student loans
- High unemployment for younger Millennials
- Static income levels
- Low quality corporate retirement plans or lack thereof
It's quite apparent that the cost of a college education has become ridiculous. Just check out the chart below that depicts various price changes on US consumer goods, services, and wages compared to overall inflation. College tuition and textbooks are soaring at the top.
Not only are graduates drowning in student loans, quality high-paying jobs are harder to come by. In the past, it was common for graduates to take short-term retail jobs while waiting to secure an optimal full-time job. Nowadays, not only has the availability of retail jobs declined but employers are more hesitant to hire recent college grads according to the National Association of Colleges and Employers (NACE). Available jobs in sectors like insurance have also declined and been replaced with automation and algorithms.
These challenges are resulting in higher unemployment, lower wages, and massive student loan debt for the millennial generation. In addition, those Millennials who are able to find work, often don't have access to any retirement savings plans through their employer or have low quality benefits.
This is troubling because starting to save for retirement in your 20s is essential to take full advantage of compounding returns. And with the challenges young people in their 20s are facing in getting their careers off the ground, investing often doesn't make it to the top of their priorities.
How To Save For Retirement In Your 20s
Despite these challenges, all is not lost! There are steps you can take that will empower you to save for retirement in your 20s and beyond. Here are four suggestions to get started.
1) Continue a low-cost student lifestyle after graduation
If you haven't found a job yet, don't give up hope. Applying for jobs is a bit of a numbers game and also a lot of who you know and connect with. Even if you've already sent out dozens of resumes, don't stop filling out job applications because eventually you'll get hired. Utilize your alumni network, consider volunteering or taking an internship to get your foot in the door, ask your family and friends for help, and temporarily move back in with mom and dad if you need to.
Once you are fortunate to land a good job after college, don't run out and buy a new car, splurge on a posh apartment, a new smartphone or designer goods. Use as much of your existing wardrobe as possible, take public transportation or keep your beater car, find a cheap rental with a roommate, and limit how often you go out for dinner and drinks. Start paying down your student loans and use a free wealth management tool to stay on top of your finances. Opening a retirement account is another top priority and make sure to get it set up for automatic contributions.
2) Forget FOMO and cut entertainment expenses
Social media is great for staying in touch with friends and family, but it is a horrible cause of FOMO. I'm sure you have at least one person who is constantly popping up in your feed taking selfies on the beach, touring Europe, sporting their new wheels, showing off their latest purchases, etc. Do yourself a favor and block those notifications or just take a break from social media all together.
Your 20s is a time to keep all of your expenses as tight as possible, especially entertainment. Even little expenses can add up quickly, so keep close track of where your money goes each and every day. Did you know that if you put $150 into an investment that yields 8% each year over 40 years, it could translate into $500,000 in retirement savings? Pretty impressive when you have time on your side.
3) Hustle to raise your wages and earn multiple income streams
Once you have established yourself at a steady job, do your best to ensure you are earning market rate or better. Put in your hours, set and reach goals for promotions, and ask for raises at regular intervals throughout your career. If you don't ask, you probably won't get. Managers like employees who are proactive, exceed expectations, have unique skills, show loyalty and determination.
When you're not at your main job, how do you spend your time? Are you wasting it binge watching Netflix shows or playing video games? While it's ok to have some time to unwind and relax each week, consider using some of your free hours to earn some extra income on the side. The gig economy is hopping and there are lots of different ways to side hustle.
4) Maximize Your Work Benefits
How well do you know and utilize the benefits offered by your employer? Take time to thoroughly read all of the offerings and talk to HR if you have any questions. Did you know that some employers offer free contribution matching on employee retirement plans? Find out if there is matching, and if the cap is based on a percentage of your income or an absolute dollar amount. Company matching is an excellent benefit; make it a priority to maximize every free dollar you can get.
If your employer offers a benefit to buy their stock at a discounted price and you are confident in the company's performance, this could be an investment opportunity to explore. Just be mindful of the importance of investment diversity across all of your assets. In other words, don't put all your eggs in one basket.
Start Saving For Retirement Today
No matter how young or old you are, don't depend on Social Security to provide a significant stream of income in your retirement years. Take matters into your own hands. Live a frugal lifestyle, watch all of your expenses closely, open a retirement account and invest for yourself. After all, no-one cares more about your future than you.
Life can throw unexpected twists and turns along the way, but proper retirement planning can help you withstand any curve ball. Be as realistic as possible with your desired lifestyle needs, savings goals, day to day expenses and unexpected emergency costs. Make things easier on yourself by utilizing retirement planning tools to help take the confusion and complexity out of the process as well.
Personal Capital has the best retirement calculator and planner on the market because it uses real data and Monte Carlo simulations to come up with the most realistic financial scenarios for your future. Other calculators simply ask you to guess input values to then come up with your financial future. The problem with this method is that we often underestimate how much we are saving and spending.
With Personal Capital’s retirement planner you can input different life events such as a wedding or home purchase in your cash flow statement and recalculate your financial future to see how you’ll do. Personal Capital has by far the best retirement calculator online.
For further clarity and confidence into your financial life, simply sign up for Personal Capital, link all your accounts, and their Retirement Planner will use your real time account data to compute real outputs for your future. Everybody should give it a try.
About the Author: Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school working at Goldman Sachs and Credit Suisse. He owns properties in San Francisco, Lake Tahoe, and Honolulu and has $810,000 invested in real estate crowdfunding. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $220,000 a year in passive income, partly thanks to his investments in real estate crowdfunding. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.