The Biggest Tip for Planning for Retirement in Your 20s and 30s | Molly’s Money

If this is your first time here, Molly’s Money is a regular series I write on this blog that includes ALL things personal finance – debt management, budgeting, home buying, savings, investment, etc. I am NOT a financial advisor, but I am married to one! These are just things that I have learned over the years as I struggled with my own personal finances and ultimately, became debt free in 2012. Got a question about money that you want answered? Leave it in the comments below or email me!

When I graduated college, I felt completely unprepared for the real world… financially. While college prepared me for a lot of things, finances in the “real world” just wasn’t one of them. I didn’t really know what a 401(k) was, I didn’t know how to really figure out what a good “benefits” package at my job was, I didn’t know about investing, and I certainly didn’t know about the importance of planning for retirement (or how to even going about it).

Now eight years out of college, I know so much more now and there are so many things that I WISH I knew eight years ago. Would have saved me a lot of headache in the long run. But, you live and learn! Literally.

Anyway. My husband happens to be a financial advisor and one of the main things he does is work with people on planning for retirement… so, I was talking with him about this topic the other day and I asked him about the people that he meets with and works with and helps… I asked, “What do THOSE people (people in their 50s, 60s, and 70s) wish they had known in their 20s and 30s about planning for retirement? “

SO, I thought it might be really helpful to y’all to share some of what he told me! I formatted this post in more of a “Q&A” kinda setup, so I hope this is helpful!

1. What’s the best way to start planning for retirement when you’re in your 20s and 30s?

At this stage of your life, you don’t need a very complicated strategy. You just need to save and invest.

Here’s a quick example of the power of saving during this period of your life:

Let’s suppose that you invested $5000/year from age 22-27, your first five years after college AND NEVER INVESTED ANOTHER PENNY.  That’s a total of $25,000 invested.  Let’s also suppose that you invested in some mutual funds that averaged a 7% annual return over the course of your lifetime (that would be a very achievable return over a long period like that).  At age 65, your $25,000 will have turned into $326,000.(!!!)

Now, let’s suppose that you wait 30 years until age 52 and then say to yourself, “Oops, I should probably save some money for retirement.”  And then you do the exact same thing, investing $5000/year for five years (ages 52-57), with a 7% average return.  Now, at age 65, your $25,000 will have turned into $42,000.

Sort of a difference, huh?  That’s the power of investing early in life and taking advantage of all of those decades of compounding growth.

Now, you might be saying, “There’s no way I can save $5,000 a year right out of college! All of my money is tied up in food and shelter.” I understand.  I couldn’t save that much either at that stage of my life. You might also be saying, “I don’t really even know what a mutual fund is.”  That’s ok, because that’s not really the point here.  My point is simply that any money that you can invest at a young age in any sort of vehicle that has some decent growth potential can make a huge difference for you over the course of your life.

2. My job offers a 401(k).  What am I supposed to do with that?

First, let’s explain (briefly) what a 401(k) is… A 401(k) is simply a vehicle that allows you to invest on a regular basis (through deductions from your paycheck) with pre-tax dollars.  Using a 401(k) can be a “painless” way to save because the money is coming out of your paycheck, which means you never really miss it.  You didn’t bring the money home and then write a check to some investment company.  You just never brought the money home in the first place and probably didn’t give it a second thought.  So, that makes it easy.

Another great advantage comes into play if your company is matching your contributions.  Let’s say that your company will match 100% of what you contribute to the 401(k).  If you saved $100 each paycheck, they’d put in another $100 for you.  That means that you’ve DOUBLED your money immediately.  Trust me when I tell you that there’s nothing else you can invest in that will immediately double your money for you.  So if your company is matching what you invest, it’s borderline insane to not take advantage of it.  That’s just free money you’re leaving on the table.

Not all companies are going to match you dollar-for-dollar, but even if they match 25% or 50% of what you invest, that’s still free money that you don’t want to pass up.

Some companies don’t match anything at all.  If that’s the case, there’s a good chance that you’d be better off to do your investing on your own in a different account, but you have to take a look in the mirror first.  Ask yourself if you’ll have the discipline to actively invest the money on your own when it’s not being done for you as a payroll deduction.  If you have a hard time envisioning yourself having that discipline, then I’d recommend just using the 401(k) and taking advantage of that “painlessness” we talked about earlier.

How do I save and invest on my own (if my company doesn’t offer a 401(k) or I’d like to save money in addition to my account at work)?

You could go about it several different ways.  You could always talk to a financial advisor about getting an account set up, but if you’re just getting started, there’s really no need for you to have an account that you’re paying someone to manage.  For the first few years, your goal should just be to start saving and building up your account.  Once you’ve grown to a certain size, then it will make more sense to have someone managing it for you.

There are several companies you could use.  E*Trade or Scottrade are good do-it-yourself options.  Fidelity or Vanguard would work too. You can just set up an account, transfer money from your checking account, and start picking things to invest in. You can do it with basically no guidance, or you can ask for some basic advice from the folks at these companies.  Now, any advice that they give you is going to be biased, because they’ll be trying to direct you to mutual funds or other products that will help them get paid, but if you were planning to invest all of your money in diseased livestock, and they instead pointed you toward some basic index mutual funds, it’s probably a good thing that you had some guidance.

You could also do all of this at your bank.  Almost all banks have folks there who can help you set up an account and start some basic investing.  I can’t promise that the quality of the investment advice will always be outstanding, but if you’re just getting started, their guidance will be adequate.

So there you have it… a 36,000 foot view on planning for retirement in your 20s and 30s…

The biggest point of all of this is: SAVE AND INVEST EARLY IN LIFE. No, but for real. Seriously. Save and invest early in life. It makes a MASSIVE difference.

I’ll definitely be writing another post soon that delves a little deeper into the different between a 401(k), a traditional IRA, a ROTH IRA, etc. But, in the meantime, you can check out this post that I wrote that gives you some idea.

What about you? Learn anything new? Anything you hadn’t thought of before? Do you have any tips that you would add?