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A Younger Approach To Retirement

31 December 2012 2 Comments

Planning for retirement for people in their 20s can be difficult. There are a lot of questions that need to be addressed such as where to save or invest, how much to invest, and how much risk to take. A closer look at saving for retirement at a young age can be very fruitful.

The Basics

There are thousands of ways to save and invest money, some better than others. As important as these topics are, the most important thing is to actually start. According to the Department of Commerce, the savings rate in September 2012 was 3.3 percent for the average American. A low figure for those planning not to work the rest of their lives.

One of the biggest struggles facing American’s who want to retire is they do not have enough money saved. In order to have the money to live comfortably, one must be dedicated to saving at a higher rate the average American currently does. For a person in their 20s who plans to retire, the first step is to save money. Saving only 3.3 percent will not be sufficient to create the nest egg most would like to have for retirement.

How Much Should I Save?

According to “The Richest Man in Babylon,” one should consider saving 10% of all their income. In fact, it goes farther in saying that one should pay themselves first, above all others, as a way to build and create wealth. Establishing a pattern early can create positive future results as you’ll see below.

Example:

If the target nest egg is $1,000,000 for retirement at age 65, and the average return on investment is 7%, the following monthly savings amount is as follows:

  • A 40 year old individual will need to save $1,234 every month in order to reach a $1,000,000 retirement.
  • A 20 year old individual will need to save $264 every month in order to reach a $1,000,000 retirement.

Saving at a younger age is one of the best financial decisions that can be made. As is evident in the figures above, the longer one waits to start the saving process, the more one has to contribute. So even though an individual will tend to earn more as he/she get’s older and develops more skills, the older he/she gets, the more he/she will have to save. Saving less today can be equivalent to saving more later.

Risk Verse Reward

In many cases, planning for retirement entails risk. So how much risk should a financial plan have?

A common misconception in financial planning is that the younger an individual is, the more risk they can take. The truth is just the opposite. The younger an individual is, the less risk that individual has to take.

Besides not having wrinkles, youth has one advantages that is essential in financial planning… Time. Instead of having to take risk in order to have the money necessary to retire, a person in their 20s can eliminate a lot of risk from their finances, knowing they have time on their side to build the nest egg they desire.

Sacrifice Today For A Better Tomorrow

The final point to make is this. Foregoing some of life’s most exciting opportunities while young can be a wise financial decision for tomorrow. While most people in their youth are trying to keep up with each other- new cars, nice homes, expensive entertainment- they are missing out on what they could have tomorrow. It is better to forego some immediate pleasures today for even better things tomorrow.

Time is the most expensive thing one can lose. Once it’s gone, it never comes back. Finding a way to sacrifice and save today, can lead to a life of plenty tomorrow.

Jake is a Certified Financial Wellness Educator and expert on The Infinite Banking Concept. You can follow him on twitter @jakeathompson

2 Comments »

  • Kat - Suffolk Care said:

    It's difficult to save when you are young; you don't want to wait to spend your money and you are always going for the things in the 'now'. However, even saving the smallest sum of money will benefit later on.

  • John said:

    Great advice! This needs to go out as a pamphlet for young people today!