Updated on 10.17.14

Retirement Questions for People in Their Twenties

Trent Hamm

“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.

Three Questions For Twenty-Somethings to Ask Themselves

1. 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.

2. 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.

3. 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.

Good luck.

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  1. Kyle says:

    My advice would be to try to avoid any decisions that lock you in long-term. What you want when you are 20 may not be what you want when you are 25, let alone 50.

  2. Craig Ford says:

    I’d tell Shane that if the 10% is not too restricting for him today then he should just keep saving his money. Retirement is a long way off, but developing good saving habits now will pay off in the future. This is true even if you work for the rest of your life.

  3. KC says:

    Its certainly a good idea to take advantage of the full match on the 401k. And, by the way, that’s a terrific match. Invest in the security or securities that offer the lowest fees. Fees will eat up your investments and unfortunately in a 401k all the options will have fees. So pick the one (or a few) that have the lowest fees. Past performance means nothing as mutual funds typically underperform anyway.

    You likely will get a greater grasp of retirement and what you want to do as you get older. The best thing now is that you are saving. 10% is a very good rate of saving at your age – good decision.

  4. Broke M.B.A. says:

    Hi Trent,

    Your advice stating “just worry about saving now – don’t sweat the details” is excellent advice for those in their early twenties. It sounds like your reader is doing just that.

    It’s also refreshing to hear retirement advice that takes one’s desired lifestyle into consideration. But when you are in your early twenties, you probably don’t have a very good idea about the type of retirement you want, so your advice to just get started really applies.

  5. I have one counterpoint to the idea of working for your whole life.

    There’s nothing wrong with planning on working your whole life… especially if you enjoy what you do. But I’d still advise saving fully for retirement for 2 reasons. The first, Trent mentioned slightly and that is you probably won’t be able to drop dead with the hammer in your hands. Some people become disabled and unable to work a long time before they die.

    The second reason is that although you currently are happy with the idea of working all your life a couple decades down the road you may change your mind. If you do end up changing your mind about working forever and don’t have money saved up than you won’t have the option of retiring.

    Overall really great advice!

  6. Steven says:

    “Just worry about the saving for now – don’t sweat the details.”
    I like your advice Trent, and it’s what I’ve done since I’ve been employed for the last year.

    I’m an engineer by trade, and like to dabble in personal finance and investing as a hobby and personal development. I maxed out my 401k, 6% with 50% match (unfortunately I only get 20% per year). And I’ve been planning on opening an IRA, but I keep putting it off. I’m pretty frugal, living on a budget someone resembling my college days, but loosened up a bit since I actually have money now.

    The only difference is, I don’t have a savings account. I have a good grasp of my finances, and I don’t impulse spend, so I keep my money in my rewards checking account. I maximize my interest, and since I pay with plastic anyways, not a big deal to meet the minimum requirements. I use debit for all my small purchases, which amount to ~15 a month, and everything else goes on the credit card which is paid off at the end of the month.

    To me, the bulk of my retirement savings will be money I earn and save, not from investment gains. I am planning my retirement along the lines of what I’m guaranteed to have. Any gains from investments I dabble in will just be a bonus, and money I have in investments later on in life, will be 100% disposable in case of a stock market crash. As long as I keep lifestyle inflation in check, i should be able to have a nice retirement even without investing in stocks.

    Currently, I’m a 23 Y.O engineer, pretty much fresh out of college. To me, my earnings will go up as I gain more experience, and the best return on the investment of my time is to improve myself as an engineer. I am proactive in solving problems and reading up on new developments within my field to stay informed.

    In one year’s time, due to lucky breaks (yeah, this recession helped my position within the company), I’ve gone from the bottom of the totem pole to one of the people they depend on for certain aspects of the design process. I came in with a little specialized knowledge, and ended up being the company expert on the material. As they came to me more and more, my knowledge, experience, and expertise relative to the company increased.

    My career plans pretty much jumped a couple steps because I was proactive in learning on my own time, putting in hours and compiling research and data on my own time, to improve myself. The return on this will grow even more as time goes on.

  7. As most believe that they still have to work for money most of their life, I would also like to add the possibility of retiring in your earlier 30s and spending your life on something different than earning money.

    As several have already mentioned, even though you like your job now, this may change down the road and maybe faster than you expected(*). If so, it is really nice to effectively be financially independent. This of course requires the concentration of a lifetime of savings within a decade and thus savings rates way above and beyond the standard 10-15%. This also means that one has to look elsewhere than 401ks and IRAs which have been designed to keep most people in their jobs until they are too old to work—same with standard 30 year mortgages.

    (*) Consider that if you love your job with a passion, you could also grow to hate your job with a passion. Being more agnostic towards your job may be a safer long term strategy if you plan to be tied to a job for most of your adult life.

  8. It’s so true that people in that age group can’t imagine ever being retired. Just keeping a job and staying afloat is enough to use up all their thinking.

  9. Amateur says:

    #7 offers great advice for long term. Many jobs have poor longevity in keeping people in their positions or even in the field because of age discrimination or high burnout rate over time. The only way of safeguarding against this is being able to adjust expectations that careers do often change years down the road. The only way to prepare is to save early and learn to live below means while young to do things like return to school, change careers, or even change countries.

    The final piece of #7’s advice is really good for young professionals. Even if the job is great now, a bit of management change can turn it into a nightmare situation. Not having enough experience to leave for something better, that can be a career staller.

  10. “Just worry about the saving for now – don’t sweat the details.”

    The 23 year old tells you he is clueless.

    He tells you he put the money where someone told him to put it.

    And you say don’t sweat the details.

    I must strongly disagree.

    Suppose he put it all into one stock because he was given a tip? Would you tell him that it’s ok? Of course not.

    Suppose he put all of it into his own company’s stock. That’s terrible also.

    I know you are a believe in passive investing and don’t need to sweat the details, but this guy must at least place his funds in something reasonably appropriate. With LOW fees.


  11. Faculties says:

    When you’re in your twenties or thirties, the idea of working happily till you drop seems very possible. When you get closer to retirement age, you see a lot of people your age and slightly older with serious health problems and not enough money to retire. They figured they’d just keep working, so they didn’t save enough money to stop. Heart disease, strokes, bad arthritis, auto-immune disorders… If you save enough to retire, you can always keep working anyway if you’re healthy. But if you don’t save enough, it’s too late to change course when you’re 60 and you have a stroke. Hope for the best, but prepare for the worst.

  12. jc says:

    I would agree that fees can be an issue and drain the actual money in your account if you aren’t careful so I would recommend that some research is done to insure the funds invested in are not high fee funds. I know in work situations you generally don’t have much say in the companies but there are bound to be some winners in most companies you can search out.

    I think it is generally recommended to invest in a no-load mutual fund. I think the fees should be under 1% (but I can’t remember for sure) and no 12(b)1 fee.

    Suze Orman covered this at some point so she may be a good starting place for some research. Vanguard has some good funds and there are other firms out there as well if they are on your list of options.

  13. Brent says:

    As a 25 year old that has spent a decent amount of time looking at this stuff. You are on the right track. put that 10% in and try to pick either a index fund or a target date fund (that is way far in the future). That 10% is a gift, and if you are just starting out, you wont miss it, but you will be very grateful you did it so early when you are thinking about when you should actually call this working thing quits.

  14. Dishes and Laundry says:

    Assuming you’ll have only one or 2 years where you’ll be unable to work due to declining health is like taking a $5000 insurance policy on your car in case you smash up someone’s car door a bit. You really don’t get to decide “I will be one of the ones who won’t get sick or disabled” any more than you get to decide you won’t be the guy who gets totalled by a drunk driver.

    You can decide to take on the risk, but you can’t decide not to have the risk of ending up with 10, 15 or even 30 years of a retirement in which you are unable to work at most jobs. Now, you may have such a portable/flexible career where there are few disabilities which would sideline you, but most folks don’t.

    OTOH, in my case, I saved heavily for a retirement I will not live to see. So the risk runs both ways.

    Life is a very uncertain proposition.

  15. Kevin says:

    As Mark pointed out, he should at least make an effort toward minimizing the fees dragging on his 401(k). Unfortunately, most 401(k) plans don’t have any low-fee options, because the employer gets a kickback from the fund administrator. In order to afford that kickback, the fund administrator needs to charge above-average fees. If they offered a low-fee fund and everyone flocked to it, they could not afford the commissions they pay to the employer. So be aware that whatever your options are in your 401(k), they are almost certainly ALL overpriced. As such, simply try to diversify a bit. Direct some toward a small cap fund and some toward a large cap fund. Direct some toward foreign investments and some towards domestic. But only invest as much as is required to get the full match from your employer.

    Further, I’d add the following. Know that saving 10% is not going to be enough. Do not depend on Social Security being present when you retire. Understand that you and you alone will need to bear the responsibility of providing a comfortable retirement for yourself, and 10% is inadequate. Beyond your 10% in your 401(k), you must also open and fully-fund a Roth IRA (the max is currently $5,000/year). Finally, I would also strongly recommend opening an after-tax investment account with a reputable broker offering low-fee, passively managed index funds or target-date retirement funds, like Vanguard. Set up automatic contributions to this account for another 5-10% of your income.

    Make as much of this automatic as possible. Then forget about them. Live your life, enjoy spending what’s left, enjoy being a young man in the prime of his life. If you’re sincerely interested in this stuff (and most of the people here are), then of course delve into it and read a bunch of books. Use the knowledge you gain to tweak your investment allocations. But if you only do what I’ve recommended here, you’ll still be miles and miles ahead of your peers.

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