Five retirement tips for 20-somethings
If you're a typical 20-something, you've got a college loan payment, a cellphone payment, and one or more credit cards that you're making minimum payments on, not to mention food, healthcare, and rent. But there is one thing that you have going for you: You are in the best position of your life to start saving for retirement. And here are some fairly painless ways to do it.
Compound interest works in your favor. "The earlier you start, the less you have to save every month," says Dallas Salisbury, president and CEO of the Employee Benefit Research Institute. "Start at 20, and set aside 15 percent of every dollar you earn, are gifted, or inherit, and you will be in good shape at retirement age. Wait until 40, and it will have to be 25 percent or more of every dollar earned. Wait until 50, and it will be 45 percent of every dollar earned." The money you invest now still has lots of time to grow before you even think about retirement.
Matching is free money. "If you are in the younger generation, the chance that you will be covered by a defined benefit plan is less than the chance that your parents had," says Andrew Eschtruth, associate director of external relations at Boston College's Center for Retirement Research. But it is more likely that you will be given the opportunity to participate in a 401(k). You should make sure to put enough money into the 401(k) to receive the full employer match.
Take it with you. People in their 20s have a reputation for job hopping. But when you leave a job, don't forget to take your retirement plan with you. Many people will simply pay the tax penalties on their old retirement plan and keep the cash. "If you do that two or three times as a younger worker, you are really sacrificing a large amount of money down the road when you turn 60," says Eschtruth. You can avoid the fees by rolling a 401(k) over into an IRA, where the money can continue to grow, penalty free.
Don't count on Social Security. Anyone born after 1960 will not qualify for full Social Security benefits unless retiring after turning 67. If you retire earlier, the amount you get in each check will be reduced. So you will either have to wait longer to claim your full benefit, or receive a reduced benefit compared with your parents, says Eschtruth. So, although Social Security may still be around to help fund retirement, it should not be counted upon as an exclusive source of income.
Take personal responsibility. Today about 33 percent of retirees get a monthly check from a pension, 28 percent receive health insurance from a former employer, and only about 7 percent of retirees' income is from savings, including a 401(k), says Salisbury. But for people in their 20s today it is likely that 10 percent or fewer will get a monthly pension check or receive health insurance in retirement from an employer, Salisbury predicts. "It is too early to tell if it will be, but savings could provide income for 75 percent of future retirees and could provide as much as 35 percent of income for many," says Salisbury. The bottom line: As retirement planning becomes more and more consumer driven, no one else is going to plan retirement for you. It's something you need to do yourself.