You’ve heard it a thousand times – it’s important to save for retirement. But in the midst of student loan payments, inflated housing costs outside the bubble of your college town, and finally replacing the car that’s somehow survived until your first post-grad job… setting aside a portion of your paycheck for retirement can end up on the bottom of your priority list. And we all know, as a 20-something, you hate being told what to do by others who grew up in a world half as complex as the one we live in today. As a 20-something myself, hear me out.
Whilst studying finance in a program ranked 5th in the nation, I was involved in several investment projects (running a $300,000+ fund), spent time working as an intern at a wealth management firm, and surrounded myself with investing wisdom. I decided to take the Corporate Finance route in terms of my career… so the only money I invest now is my own, in the form of my 401K.
From that perspective.. here are some things I think every 20-something should know about investing and saving for retirement:
- Know your number. There are lots of “retirement savings calculators” out there which use inputs such as your desired post-retirement cost of living, current salary and retirement contribution, and expected average rate of return. You might be surprised to find out that most people who want to maintain their current lifestyle at say, $50,000 yearly salary (and we all know many of you would like to exceed that), will need well over $1,000,000 in their retirement fund by the time they reach 65. Yes, one million dollars, minimum. Feel behind yet? Also, if you’re thinking to yourself, “By then I’ll be satisfied living off cans of tuna, baking cookies and gardening all day – low cost lifestyle!” (direct quote from my own mother), think again. Chances are, you’ll be spending quite a bit more on health care, and don’t count on losing all interest in living comfortably just because you’re older.
- Don’t Wait. Time is money, literally. If you don’t know anything about the power of compounding, read up. The difference one or five years can make on the same contribution, at the same rate, is phenomenal. The earlier you put money away, the less catch-up you’ll have to do later.
- Put away 20%. This is going to sound crazy, but on my last day working under the guidance of a retirement planner, I asked how much fresh college grads should invest in their retirement – and he said, “Twenty percent. No one does it. But if you were wise and wanted to jump-start your future, you’d put away 20% before you ever saw that money.” And that’s what I did. Right off the bat, set up your 401K to automatically take 20% from your paycheck. If you do it from the beginning, it will be easy to become accustomed to the reduced amount on pay day. If 20% drastically affects your day-to-day life (I’m not talking about missing out on morning lattes… I mean, you can’t afford gas), 15% is acceptable. Think about it this way….combined with the fact that time is on your side in terms of compounding interest… the more you put away now, the less you will have to later – when you also have a house, spouse, kids, and corresponding stack of bills. You might think you’re living unfashionably now, but get over yourself and think long-term. You’ll thank yourself later.
- There IS such thing as a free lunch. In almost every situation, you can argue that there is no such thing as “free.” But when it comes to employer-matching, this is absolutely not the case. Most employers match anywhere from 3-5% (one friend works for a company that matches 8%!!)… and if you aren’t opting in for this, you are missing out on purely free money.
- Invest in Stocks. Everyone has a different risk tolerance profile. But in general, if you’re in your 20s, you should definitely have a majority of your investment in stocks. I would say at least 70-80%. Personally, I invested 85% of my portfolio in stocks because I started at age 22. The more risky your asset allocation, the higher your potential rate of return. In the same fashion, this increases your risk of losing a chunk of money. But if you’re in your 20s, you have the time to take these kind of risks. As folks get older, most alter their asset allocation to a more conservative mix, with a majority in bonds. Why? As you near retirement age, you don’t have as much time to rebuild your savings in case of loss, so it makes sense to turn to bonds, which have a low rate of return, but are also very low risk.
- Buy and Hold. Our generation is infamous for needing instant gratification. Grow up and invest for the long run. Unless you are moving thousands of shares at a time and the trade fee is tiny in comparison, it’s really not worth it to actively trade in your retirement account. If you really think you can consistently outsmart the market, do your experimenting with money you’re willing to lose in a separate money market fund. For your 401K or IRA, use ETFs to establish a low-cost, diversified account. Keep an eye on your money, but if you are manually re-allocating your portfolio even as often as once per month, you could be wiping out your gains with the cost of fees.
- One exception. The only exception I’ll list for reducing the amount of retirement allocation (and I mean, reduce it to a minimum of 10%), is paying off credit card debt. While student loans are usually in the 5% range (something you can out-perform with your retirement account), credit card rates can be 25% or more. If you have any amount of credit card debt, make it a priority to pay it off as quickly as possible. And while you’re at it, cut that thing up!
Of course, I have to include the old “I’m not a professional – do your own due diligence” disclaimer, but the moral of the story is that retirement should be on your mind as soon as you get your first “big kid job.” Don’t wait until you’re 30. Don’t miss out on the free lunch. And don’t be a fool when it comes to sacrificing a little now so you can save yourself later!