As parents to 3 adult daughters – yes, the twins are almost 20 and Maeve will be 22 years old this month, believe it or not – Jill and I are realizing that our penchant for doling out advice isn’t always appreciated as much these days. Sure, we still hep out with the occasional question about that knocking sound their car is making, or what temperature the oven should be for a new recipe. But the girls are growing up and making some bigger life decisions on their own, which is actually a good thing. It shows me that they’re maturing, even if they occasionally make the wrong choices. And thanks to my career I still have some influence with them in the financial arena, for which I am grateful.
Maeve in particular came to me for advice on investing. As she soon leaves college behind and enters her career in nursing, she is keenly aware of the challenges of investing and preparing for retirement, thanks to good old dad and his sometimes-unsolicited advice. While we’ve talked about money basics over the years, Maeve now understands that her savings habits will need to change. As she reviews the insurance and savings options with potential employers, she asked me to help her figure out how she should be spending her money. And, yes, the ol’man will be happy to have one off the Cutter household payroll!
Maeve and I talked about how it’s fairly common in your 20s to be paying off student loans or learning how to manage your finances. At this age, retirement seems so far away that it doesn’t even seem real. In fact, this is one of the most common excuses people make to justify not saving for retirement. At this stage of life and into the next decade or two, you probably have numerous priorities competing for your money. Housing, mortgages, getting married and have children, car payments. They all vie for your dollars.
But, as I told Maeve, it’s crucial that she doesn’t lose sight of retirement. Given the uncertainty of today’s markets, 40 year high inflation and questions surrounding the future of Social Security, she’ll need substantial assets to retire herself someday – and starting early will make that task significantly easier the sooner she starts.
You see, if you save even a little bit in your 20s, compound interest will do much of the work of building a nest egg for you. And saving in a retirement account could further provide you with tax breaks as well as matching employer contributions. So, this week with our time together, I’d like to discuss a few ways to make saving easier – and more fruitful over the long-term – for those youngsters new to the workforce.
One of the first steps you should take when you first start out is to create a budget. This helps create a plan you can stick to and will ideally ensure that you’re putting money aside, too. If your company has a 401(k) plan, you can start saving there, or, you can also start putting money away in an IRA.
Even a relatively small contribution will add up over time, especially if your company will match it. For example, let’s assume you put away $100 each month in your company’s 401K plan and they match that $100. After 40 years at a 5% return, you will have almost $300,000 saved₁.That’s a tidy sum for a fairly painless contribution amount!
Sure, you may not earn a lot of money as you begin your career, but there’s one thing you have more of than richer, older folks: time. With time on your side, saving for retirement becomes a much more palatable experience. And it can actually be easier to save for retirement when you’re young and may have fewer responsibilities.
Remember, the longer you wait to plan and save for retirement, the more you’ll need to invest each month. While it may be easier to enjoy your 20s with your full income at your disposal, it will be harder to put money away each month as you get older. And if you wait too long, you may even need to postpone your retirement.
So once you’ve decided that dipping your toe into investing is the right step, what’s next? I typically recommend that you start by identifying your investment goals. You want to make sure you set realistic expectations, and that means knowing how much money you might need in retirement and how to use time to your advantage to help reach that goal.
If your employer offers a company retirement plan such as a 401k, 403b or other such plan, and especially if they offer a match, I suggest you take it – after all, this is as close to “free” money as you can get. You can also open a traditional IRA, which accepts pre-tax contributions, or even a Roth IRA which is funded with post-tax dollars so that you can have income in retirement . . . tax-free.
It’s also crucial to ensure you have enough liquid assets in a savings account to cover unexpected expenses or emergencies. After all, the last thing you want to do is tap into your retirement plan and pay penalties and taxes on funds meant to support you in retirement.
Look, the sooner you begin saving for retirement, the better. When you start early, you can afford to put away less money per month since compound interest is on your side. Or I like to say, money making money on top of money. For people in their twenties, the most important aspect of saving is to just get started. And that’s advice you can take to the bank!
So as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA.