5 Ways You Can Mess Up Your Retirement in Your 20′s
I know how far off retirement seems when you first enter the job market laden with student loan debt and ready to finally live like an adult. I also know that whether or not you are actually able to retire in that distant-feeling future can be a direct result of your saving behavior in your 20’s. Here are the 5 things that 20-somethings do that can really mess up their chances for a comfortable retirement.
- They don’t start saving until they have a “real” job: Saving for retirement isn’t just for the salaried in their field of choice. You can open an IRA as soon as you have earned income, even if your first job is bartending while you continue to search for your dream job. You’re never going to feel like you can “afford” to save, just like there’s never a perfect day to start a diet. You just need to start. Time is on your side.
- They wait until they’re eligible for a 401k plan before saving: If your employer has a wait period before you are able to participate in their 401k plan (many employers have a one year wait), that doesn’t mean YOU must wait to save for retirement. Get used to the salary deduction by saving the amount you would put in the 401k if you could, and put that money in an IRA instead. Then when you actually are eligible, it won’t feel like a pay cut to enroll in your 401k and take full advantage of your employer’s match.
- They put their savings in cash or lower-risk investments: Have you heard of the Rule of 72’s? It says that dividing 72 by your interest rate gives the number of years it will take your money to double. So if you put your money in a 1% savings account, it will take 72 years for it to double. Retirement may feel like eons away, but it’s not 72 years away! I can understand why you would hesitate to subject your hard-earned savings to the possibility of market loss, but you have time to recover from market crashes. Market volatility (stocks going up and down) is a fact of life, and while there is no guarantee that history will always repeat itself, a well-diversified portfolio that includes investments in stock market has always been a better option than cash or bonds when the investor (you) has many decades before he/she will need their money.
- They pick their investments willy-nilly: Once you are eligible to participate in a 401k plan, your plan will most likely give you a select number of mutual funds to choose from. If you don’t know anything about the stock market it can be hard to figure out what funds to choose. Don’t do what I did with my first 401k and just put 5% in each option. Bad idea! If you truly don’t know what to do and you don’t have a trusted professional or family member to help you learn, hopefully your plan offers what are called “Target Date” funds. These are funds that are allocated among the various classes of the stock market according to your desired retirement date. As you approach your target date, the mutual fund manager automatically shifts more of the investment into less-risky asset classes like cash and bonds. It takes all the guesswork away! In the meantime, start to educate yourself on investing with books like my personal favorite The Wall Street Journal Guide to Understanding Personal Finance.
- They let it ride once they’ve selected their allocation: One of the beauties of making savings automatic is that you don’t have to think about it, it just happens. I love “accidental” savings. However, it is important that you check in with your retirement savings accounts at least once a year to make sure the investments you’ve selected are still the best for you. Over time, you’ll start shifting your allocation away from stocks and toward bonds and cash – you don’t need to do this until about 10 years before retirement, but you should still pay attention in between.
The bottom line is that time is on your side when you’re young – take advantage of compounding interest so that you can stop saving sooner. As I always say: Save early and save often.