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Retirement Saving In Your 20s

4 December 2009 4 Comments

A recent article posted on Yahoo! Finance written by Investopedia called Retirement Saving Through The Ages offered the usual 20-something advice for retirement.  Basically, start young.  Let’s look at what was said more closely and offer some response.

Think about it this way: If you’re 25 years old and you want to save up $1 million by the age of 65, you’d only have to invest $85 a month at a 12 percent annual return. If you wait until 35 to start saving for retirement, you’d have to put away $286 a month to reach the same goal. At 45, you’d have to save more than $1,000 a month, and if you wait until 55, you’d have to invest a whopping $4,350 a month.

This is your typical example of how starting early makes retirement saving so much more realistic and do-able.  While, these type of numbers are nothing new, we can all afford to see them again and again.

Although many people see their 20s as a happy-go-lucky time, this decade shouldn’t be all fun and games. When you reach your mid-20s, it’s time get down to some retirement saving business. Financial experts say you should start saving for retirement as soon as you start bringing home the bacon. Ideally, men should invest at least 10 percent of their income in retirement savings, and women (who typically have a longer lifespan) should put at least 12 percent of their income toward retirement.

I would argue that it is time to get down to business sooner than your mid-20s.  You should start saving immediately upon entering the work force, enrolling in a 401(k) if possible or going at it on your own; either way, start saving now.  As I’ve mentioned before, I’m skeptical that even saving 10 percent of one’s income will get an individual to where they need to be down the road for retirement.  I talk at length on this blog about the numerous challenges that we’re facing with regards to our financial future: inflation, inconsistent returns, higher costs of living, economic stagnation, lack of savings, etc.  I tend to think we will need to save 20 to 30 percent of our incomes even though pretty much nobody saves this much.

In your 20s, choose investments that offer plenty of growth. Most financial experts say that you should have 85 percent of your portfolio in stocks or mutual funds at this age. Because you still have many years to go before your reach retirement, annual stock market peaks and valleys won’t affect you. In the long run, you’ll end up with a decent overall return on your investment.

I agree that you should have stock exposure since you have a long term horizon.  I wouldn’t count on a easy 8-10% annual return over time even though almost all financial planners say you will attain that.  Such a statement is stupid in my opinion.  It basically assumes no major events in the next 30-40 years that could majorly disrupt the American economy.  American economic dominance could easily be over.  If it is, what does that mean for that guaranteed 10% annual return in stocks?

I think the better plan is to assume more like 5% return and plan on saving enough to accomodate this lower rate of return.  If you get a 10% return, that is wonderful, you’ll have even more money.

To sum up my position, save more than people recommend and don’t assume you’ll make as much on your money as most people would say.  There’s no free lunch here and nothing replaces savings.


  • Daniel said:

    10% definitely isn't enough. If you save 10% in a 401k or other retirement savings account, and in addition to that own a home, have investments, and other savings, then you're in a good position.

    Planning for a 10% return is really dangerous. If you invested $5,000 a year for 20 years and got a return of 10%, you'd have $286,375. But if you only got a 7% return, you'd have $204,977, That's a huge difference, and the longer time horizon, the larger that difference is. If you planned on having $80,000 and suddenly you didn't have it…how would you respond?

  • Wojciech Kulicki said:

    My Mom opened my first retirement account for me the day I turned 18, which turned out to be the best thing I ever did financially. By the time I got out of college and entered the workforce, I was well on my way to retirement savings. We're going to start our kids even earlier.

    The 10% assumption, as you point out, is dangerous. It's unfortunate that even very minor swings in that percentage make a huge difference in your ending balance, so dropping that to 5% means you need to save much, much more. But I do like taking this conservative approach, because if you're wrong about how low that return is, you'll just have some extra money to enjoy.

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  • Garrett said:

    Oh god, first I see you talk about $85/mo turning into a million with a ridiculous 12% avg return. And then you top that sucker off by discounting all professional advisers by saying 8-10% return isn't probable? You want a 5% return? buy a fixed annuity. Even in this interest environment you'll get that guaranteed 5% return and an unlimited income payout for life. 5% is easy. Investing in stocks looking for just 5% is pointless.

    You missed the most important part about investing when you're young. ROTH IRA. The power of a Roth is staggering, for some people even if they have a match, if its too costly to get the full match I'd even suggest opting for a 5k Roth contribution & a grand in an emergency fund over a 6k 401k contribution that gets them $200 more.