Retirement Tips for 20-Somethings
Yes, time is on your side, but only if you start putting it to use
Guess what, living in the real world costs a lot more than living on MTV's The Real World. If you're a typical 20-something, you've got a college loan payment, a cellphone bill, and one or more credit cards that you're paying the minimum on, not to mention food, healthcare, and rent. But you're also in a great position to start saving for retirement. Here are some fairly painless ways to get down to it.
COMPOUND INTEREST WORKS IN YOUR FAVOR. The money you invest now still has decades to grow before you even think about retirement. "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." Here's another way of looking at it: If you invest $1,000 per year in a tax-deferred account that earns 7 percent a year beginning at age 25, you will end up with $199,635 at age 65. Invest the same amount beginning at age 40, and you'll end up with only $63,249.
MATCHING IS FREE MONEY. Younger workers are much more likely to have a 401(k) plan at work than a defined-benefit pension. At the very least, you should make sure to put enough money into the 401(k) to receive the full employer match.
TAKE IT WITH YOU. When you leave a job, don't forget to take your retirement plan along. Many people will simply pay the tax penalties on their old retirement plan and pocket the cash-or, more likely, spend it. "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 Andrew Eschtruth of BostonCollege's Center for Retirement Research. You can avoid the fees by rolling a 401(k) over into an IRA, where the money can continue to grow, penalty free.
DO IT YOURSELF. Today, about 33 percent of retirees get a monthly check from a pension, and 28 percent receive health insurance from a former employer. Only about 7 percent of retirees' income is from savings, including a 401(k), says Salisbury. But for people now in their 20s, it's likely that 10 percent or fewer will get a monthly pension check or receive health insurance in retirement from an employer, Salisbury predicts. While saying it's too soon to be sure, he also believes that 75 percent of future retirees will depend on savings for income-and that the cash they've stashed away could provide as much as 90 percent of income. The bottom line: As pensions wither away and plans like 401(k)'s become the linchpin of your post-work years, no one else is going to plan retirement for you-that is, except you.
This story appears in the June 11, 2007 print edition of U.S. News & World Report.