10 Things to Do in Your 20s to Prep for Retirement


Although retirement may seem a long way off, it’s still good to start preparing for it now.  If you do start preparing for retirement, you can retire earlier and have more money to retire with.  Americans are notorious for having no retirement savings, a survey conducted by GoBankingRates.com in October 2015 revealed that 1 in 3 Americans have no retirement savings, and 56% of those surveyed had less than $10,000 saved for retirement. Don’t be one of these statistics! By just following a few easy, painless steps, you can build a solid nest egg by the time you reach retirement age.

1. Open an Account


If you are working for a company that offers a 401K plan, take advantage of it.  If they don’t offer a 401K plan, you can open your own IRA or Roth IRA.  Set up automatic deductions from your paycheck into your 401K, or automatic payments from your checking or savings account into your IRA plan.  You won’t miss the money you’re funneling into these accounts; your spending habits will naturally adjust.  There is even a new kind of Roth product out, the myRA, which will allow you to be invested in an account guaranteed not to lose money.

2. Take Advantage of Free Money and Benefits


Find out if your employer offers a health savings account (HAS), dependent care savings accounts, flexible savings accounts, college tuition matches or reimbursements.  If they do, be sure to take advantage of these programs. Of course, the granddaddy of free money is a 401K matching plan. If your employer matches contributions into your 401K, it’s foolish not to take advantage of this.

3. Understand How Compound Interest Works.


To get yourself more excited about saving for retirement, it’s good to understand why saving now can pay handsomely. When you put money into a retirement account, this account is paying you interest. Without trying too hard, it’s easy to earn about 6 percent on your money; the historical stock market return over the last 80 years has been about 10%. Overtime, this seeming small rate of return can actually more than quadruple your original investment.  Let’s take an example:


  • Let’s say you start saving $100/month at age 25 for 10 years.  At age 35, your money will have grown to $16,326 (assuming 6% annual return).   At age 65, that money will have grown to $72,604.


  • Let’s say you wait 10 years to start saving this money, and start saving at age 35 $100/month for 10 years.  From age 45 to age 65, that $16,326 will only be worth $44,150.


  • If you want to play around with more retirement numbers and what-if scenarios, there are a number of online calculators available.


4. Increase your Earnings Potential.


It pays to stay informed about market conditions in your chosen career path and maintain or gather new skills in your profession over time.  Attend conferences and pursue extra curricular education in your field to make sure you have the latest and greatest knowledge, so when it comes time for a promotion or a job move, you’ll be at your most competitive.


5. Get/Stay Out of Debt


One of the biggest drains on financial success is having a lot of debt.  Too much debt means that you’ll never have enough money left over from making ends meet to save for retirement.  In addition, the interest you are paying on those debts could have gone into your pocket had you invested the same amount instead of carrying a balance on your credit card.  High interest credit card debt should be the first thing to go.   Limit the number of credit cards you have, and avoid other borrowing whenever possible.


6. Avoid Lifestyle Inflation


As you increase your earnings, it’s easy to spend the extra money.  Instead of doing that, take at least part of that extra pay and put it towards your retirement savings.  When you get a raise, automatically increase your automatic savings deductions right away so you don’t get used to spending the whole amount each pay period.  Get in the habit of saving money while you’re young.

7. Buy Income-producing Assets.


Robert Kiyosaki (Rich Dad, Poor Dad) made a fortune preaching this simple, but wise piece of advice: rich people buy things that make them money, poor people buy things that cost them money.  For instance, two of the biggest expenses for Americans are usually their car and the place they call home.  A car is a terrible investment as it loses its value so quickly.  Instead of renting, why not buy a house in which you can rent out rooms to help pay the mortgage.

8. Claim the Saver’s Credit


Contributing to a 401K, traditional or Roth IRA could qualify you for the saver’s credit.  This tax credit is worth 10 to 50 percent of the amount contributed, with the largest credits going to the people with lowest incomes.  The maximum amount you can claim is $2000 for individuals and $4000 for couples.  This credit is made for people starting out after college who make low or middle income.

9. Find Out if You Qualify for a Pension


If your employer has a traditional pension plan, find out if after you retire you will receive one.  Some employers have stopped offering pensions to new hires, only paying out to those people who were grandfathered into the plan years ago.  If you do qualify, there is a certain number of years you are required to work for your employer — if you do change jobs, find out what will happen to your pension.

10. Don’t Touch Your Retirement Savings


Some 401K plans make it really easy to borrow from the funds.  What’s wrong with this, you might ask?  You’re paying yourself back and with interest.  Don’t do this!  You will lose out on all the compound interest you would have earned had you not touched the funds.  What if you withdraw money from your IRAs or 401K?  In addition to losing out on principal and interest, you’ll be charged a hefty tax penalty that you’ll have to pay when you file your taxes in April.

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