Sunday, June 28, 2009

Why and How to Plan for Retirement when you are 20?

Why Plan for Retirement Early
Financial security during your retirement is something you should start planning for right now. Modern medicine continues to extend our average life expectancy. This means that, if you plan to retire in your mid- to late-60s, you should be thinking about preparing a retirement plan that will cover your living expenses for at least 20 years. Carefully designing a savings approach now will ensure you a comfortable retirement. Don't forget that retirement planning is just one element of a comprehensive financial plan. You'll want to balance your retirement planning against other important financial objectives, such as saving, budgeting, insurance, and getting out of debt. So, you have somewhere between 35 and 45 years to plan and save for retirement. Sound like a long time? Well, it isn't really, and the sooner you start, the easier it will be. Since you have plenty of time, you won't have to sock away very much each month to ensure yourself plenty of money for your retirement years.
Common Reasons to “Forget” about Retirement
When you're in your twenties, the retirement-planning to do list is pretty simple:
  1. Save some money.
  2. Save some more.
In fact, the toughest thing for twenty-somethings is believing they should start now. If you think you're too young to bother with retirement planning, you're definitely not alone.

The thing is, you might eventually wish you had done things differently. There are a lot of older people out there who have big regrets that they waited so long to start saving. That could be you in twenty years.

Here are four common reasons twenty-somethings don't save for retirement:

  1. "I'll have more money later on."
Sound familiar? There's just one thing: You'll also have more expenses, like mortgage payments and the costs of raising kids. Saving will feel just as hard then as it does now—if not harder. You can start saving with just a few dollars a week. Get used to how that feels, and then see if you can squeeze a couple more bucks out of each paycheck.

If you stash $10 a week from age 20 to 30, and earn about 4 percent a year, you'll have $7,012. Keep up the habit until you're 65, and you'll end up with almost $66,000. Not too shabby, especially considering you'll barely miss the money.

  1. "There's still plenty of time to save."
You're right. Thanks to the power of compounded growth, the sooner you start to save the sooner the money you put in plus the investment earnings on that money will begin to grow.

  1. "I want to have fun while I'm young."
You'll want to have fun later on, too. Start small, and you can build a nice nest egg while still doing the things you love—now and later.

  1. "I'm barely getting by!"
It's easy to feel that way, but are you really? If you eat out, have cable TV, buy music, or hit the town with friends, the fact is that you've got some spare cash. No one is saying you don't deserve those things. But you also deserve to be honest with yourself: You're choosing to spend some of your money rather than saving it.

When you decide to start saving, the stuff you identify as "optional" will be the first to get cut. So it's important to know which expenses are optional and how much they add up to.

Save & Build Assets
You're out of school and you've begun working at your first job. You're finally on the path to independence after being dependent all your life. The future is in your hands, and so is your financial security.

Let's face it - at age 25 your priorities don't include reading books on retirement planning. Yet, if you don't begin the process of saving for retirement now it will only get harder with each passing year. You stand at a crossroads where you either choose good money habits or not. You either take the easy and secure path to financial security by saving from each paycheck or you follow the more common path of consumerism and financial mediocrity by putting it off until later. Which path you choose will largely determine your financial outcome in life.

Admittedly, saving for retirement is easier said than done for most 20 year olds because old age seems impossibly far away. Why save for it now? There's plenty of time so it's not a priority. Yet, every 60 year old that started building their assets later in life wishes they started earlier. The math is simple, compelling and undeniable.

There is no need to get complicated at this stage. You don't have to read investment books, get a masters degree in finance, or build some fancy plan because that would only cause you to put off doing what is important at this stage. The complication would serve as an excuse to not get started which is all you need to do. One simple action is sufficient. Max out your government sponsored, tax-deferred retirement plans. Your employee benefits department, accountant or any mutual fund company can show you how. More and more companies are offering automatic enrollment with automatic investment options making this step easy to do. Don't delay and don't hesitate. Just do it.

If your company offers a 401(k) or similar plan then contribute the maximum. You will never regret it. In addition, fund IRA's and Roth IRA's to the maximum amount allowed by law. Put as much money into tax deferred savings as you can. Few things are black-and-white clear in financial planning, but this action step is black-and-white clear for anyone in their 20's or 30's. Just do it.

For those that are savvy wealth builders another smart strategy at this stage in life in addition to funding retirement plans is to buy positive cash flow, income producing real estate financed with fully amortizing, fixed rate mortgages. Notice the details of that last sentence: positive cash flow, fully amortizing fixed rate mortgage. These are important details so don't gloss over them. Rather than rent an apartment buy a starter home or a small apartment building that you can live in now and use as rental units later. The fully amortizing loan will be paid off by the time you are ready to retire and you will have inflation adjusted income you can never outlive.

These two strategies may sound aggressive but anyone in their 20's or 30's today must own up to the idea that the baby boom generation will either bankrupt Social Security or change it beyond recognition. You can't depend on Uncle Sam to pay for your retirement. If you are going to retire in style then it is up to you to make it happen. You are on your own. Sorry, but that is reality.

In short, you have just two retirement planning action steps during your 20's.
  • Max out your tax deferred retirement plan contributions: This is the no-brainer first step that everyone should do. It requires no education or financial experience so you can start immediately. It is as simple and direct as anything gets in the financial world.
  • Acquire positive cash flow rental property: This strategy is for more aggressive wealth builders with the skills and inclination to go one step beyond the basics. It is not necessary and it isn't for everyone, but it has the unique advantage of providing inflation adjusted income during retirement that you can never outlive. You may not appreciate that characteristic in your 20's but you will definitely appreciate it in your 90's after 70 years of inflation.
The key point is to not get overly-complicated or over-plan at this stage of life because it will just serve as an excuse for procrastination. You don't need to learn about retirement planning or hire a financial planner. Just follow these two simple action steps designed to put you in the asset accumulation mode and never touch the savings that accumulate. If you keep it simple and just get started accumulating assets you will have done all the retirement planning that is necessary at this stage of life.

Oh yeah, and don't forget to have fun! You're only young once…

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