Retirement Q&A: What younger people (in their 20’s) should be doing to prep for retirement now

1. Should all 20-year-olds consider saving for retirement?

Working towards retirement should be a very high priority from the moment a person gets their first job. If someone has access to a 401K plan they should be maxing out their contribution from day one so they get as much pre-tax money into their retirement account as they can, and also get the maximum matching contribution from their employer. The money they will be saving will be growing tax-free until they start to tap into retirement—so this gives them decades to benefit from tax-free and compounded growth. A person who can start in their 20s could conceivably have a 7-figure net worth in their 40s or 50s. A person who waits to start doing this in their 40s or 50s will never be able to catch up to the level that someone who starts in their 20s can achieve.

2. Is there anyone who shouldn’t prioritize saving for retirement?

There really is not anyone who shouldn’t be prioritizing retirement savings in their life, but if a person is born into a family with wealth and has a trust fund, they should be focused on living within a budget that doesn’t raid the principle so the funds can continue to grow. But people shouldn’t blow off saving for retirement thinking that they will invent the next Google, inherit money years in the future, or they will be married and cared for by someone else. When it comes to planning for a secure and well-balanced retirement, it is ok to hope for the best in your future—but the smart strategy is to plan to stand on your own.

3. What is the primary purpose of saving for retirement? What percentage should they put aside?

It is important to understand that the United States is a capitalist society and for the most part Americans eat what they kill. We don’t have the same level of social safety nets found in many other western countries. The average monthly Social Security benefit today is about $1,600—good luck living on just that. Once people turn 65 Medicare will cover their healthcare needs but not long-term care, and it is not free and will require premium payments and ongoing out-of-pocket costs.

According to a recent?Federal Reserve Survey of Consumer Finances, the average amount in U.S. retirement accounts is $65,000. For people ages 55-65 they have on average $135,000 and for people 35 and under they have saved $13,000. These numbers are nowhere close to good enough for someone to hit the target of being able to replace 70% of their peak income from savings over the remainder of their retirement years which can last decades. If a person waits to start saving for retirement until age 35 they will need to save 24% of their income over the rest of their working years to hit the 70% mark, and if they wait until age 45 they would need to save almost half to hit the mark!

4. What are the most important first steps to saving for retirement in your 20s?

The key to getting a strong start in your 20s is to max out 401Ks, avoid debt, buy a property and build equity instead of renting and paying for someone else’s equity. Moreover, work to stay healthy so you avoid expensive health problems later in life that can wipe out a person’s savings very quickly.

5. What about if a person is self-employed or an entrepreneur?

For the self-employed, take advantage of IRA plans that will allow you to make tax-deductible savings and benefit from the same tax-free growth over years as a 401K.

6. What are the potential limitations to saving for retirement in your 20s?

The big barriers to saving in your 20s are racking up debt, carrying school loans, paying expensive rent, excessive spending, and just winging your cost of living by not living on a manageable budget.

7. What is your advice for setting financial goals in your 20s?

It is hard to predict what a person’s life might look like for decades in the future, but the realities of saving for retirement remain the same. The sooner someone starts, the more disciplined they can live on a budget, avoid debt, stay healthy, and know that it is possible to retire early if you start saving early. However, know that it is almost impossible to retire at all if you start too late.

8. Purchasing Life Insurance

More people today are opting for non-exam insurance products because of the ease of access and lower costs, but there are trade-offs. There are a number of online insurance aggregators such as Policy Genius and Select Quote where people can buy insurance based on a simple online application. There are also carriers such as Colonial Penn advertising on TV for guaranteed issue products. These tend to be lower face amount term policies or final expense products. This can be an appropriate way to purchase these types of “mass-production” policies, but for anyone who would want to buy higher face value policies, hybrid products, or have more complicated health and age characteristics it would be necessary to engage in the traditional insurance underwriting process.

Term policies are often considered “starter insurance” to bring young, healthy people into buying life insurance for a low entry-level premium. Many will have a conversion option that if you want to keep the policy past the initial time period, you can turn it into a permanent form of insurance such as Universal Life and lock in the premium based on your current age without any underwriting. For those wishing to maintain death benefit protection, this would be the appropriate course of action. If you did not convert the policy, the premiums would skyrocket in the years beyond the term and it would not be appropriate to keep the policy any longer.

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