“Shane” writes in:
I’m twenty three years old. I just got a really great job with a 401k that’s matched 100% by my employer up to 10%, which I’ve heard from others is a really great deal that I need to take advantage of. So I started investing 10% of my paycheck so I can get the matching funds.
The only problem I have with this is that I have no idea about retirement. It’s more than forty years away. I just put my money into the investment the person told me to put it into so I have no idea if it’s a good one for my retirement. I don’t even know where to start.
I get emails like this quite often from young professionals who are completely clueless about retirement – and for good reason. When you’re forty years away from retirement age, the thought of retirement seems incredibly distant. It feels more than a lifetime away – that’s because it is more than a lifetime away.
The one piece of knowledge that many young professionals do have, though, is a solid sense of self. They have a good basic understanding of who they are, even if they haven’t pieced through the details yet. And, quite often, this basic understanding is more than enough to make some sound retirement decisions.
Here are three questions I’d encourage any twentysomething to ask themselves.
If money were no object, what would you do with your time?
Some people would choose to be idle with their time, enjoying all of the freedom that comes with it. They’d party. They’d go on trips. They’d goof off. They’d play on their Xbox all day long.
Other people would want to work for something or build something. They’d spend their time with a volunteer project – or maybe even start their own. They need to have a big productive project in their lives in order to feel fulfilled and happy.
Most retirement advice is written for people in the first group. They’re the ones who, when they reach retirement age, will want to travel and spend their later years enjoying themselves with leisure as much as possible.
The other group gets personal enjoyment out of working and being productive. With the many opportunities already available for people to work as late as they’d like in life, such people will probably work at something – whether it’s gainful employment or a big volunteer project or some mix of the two – until they drop dead with a tool in their hand.
If you’re in the first group, you need to be saving as much for retirement as possible. While it’s fine to put money into riskier investments when you’re young, you should start moving into more conservative investments – like bonds or treasuries or cash – pretty early on, even as much as twenty years before retiring.
If you’re in the second group, saving for “retirement” basically means saving for the last year or two of life when you’re unable to work and also saving for some supplemental income for the last few decades of your life. You likely don’t need to kick the savings into high gear and can afford risk a little later than the other group, sliding the money into conservative investments five or ten years before you begin to withdraw it.
Are you frugal?
Do you carefully watch your pennies? Do you spend time seeking out the best deal on an item? Are you find with eating beans and rice a few evenings a week because it’s a dirt-cheap meal that’s still pretty healthy? Do you buy – or at least try – generic versions of products?
If such choices come naturally to you, to put it simply, financial life as an adult is going to be easier for you. After all, if you’re careful with your pennies, the dollars will follow. Because of this, you’re likely to have built up significant assets before you reach retirement age – in which case, pushing your retirement savings to the hilt might stand in the way of your other goals in life.
If such choices seem completely alien to you, you’ll have a more challenging road ahead of you. Almost always, you’re better off financially if you minimize the number of financial mistakes you’ll make along the way. In that case, you’re probably better off pushing your savings up a bit.
Are you interested in having children?
When you picture yourself twenty years in the future, does that vision involve children? For some people, it does – I know it certainly always did for me. For others, it does not – some of my closest friends are wonderful around my kids, but they can’t imagine having children of their own.
Parenting is not for everyone. It can be infinitely rewarding to the right person, but infinitely frustrating to others. On top of that, it’s incredibly costly – little people are unquestionably expensive. They rely on you for everything – their food, their clothes, their space, their education. If you don’t relish in this thought, parenting might not be right for you – and that’s fine.
If you do envision children in your future, kick start that retirement. The more you save now means that later on you’ll be substantially ahead of the savings curve and you can pull back on your contributions in order to devote more resources to raising your children. Even if you end up not having children, you can still pull back later on in order to enjoy travel and other adult endeavors. Also important is the fact that a well-funded retirement means that you’ll never wind up being a financial burden to your kids.
On the other hand, if you are doing everything you can to avoid the remote possibility of children, it makes sense to save for retirement at a slower rate now, allowing you extra money to enjoy the more adult-oriented things you want out of life.
Just worry about the saving for now – don’t sweat the details.
Many people get overly wrought about making sure that their money is in the “perfect” investment. To put it simply, your investment choice is secondary – by a long shot – to simply saving your money as soon as possible and as much as possible.
Start saving now. If you don’t know what to invest in, just ask for suggestions from the representative there. Since it’s a tax-deferred retirement account, you can make investment changes later on without any tax issues.
One good default choice is a “Target Retirement” plan, which basically means that the fund manager will put you in aggressive investments when you’re young, then gradually make the investments more conservative as you grow older. This is a great choice if you’re unsure.
Later on, when you’ve gained some experience in the world and perhaps learned more about investing, you can take a more direct hand in your choices.
For now, though, the best decision you can make is to simply start saving.