This is the third in a monthly series about specific age-by-age financial advice for 20-somethings. You can find the rest of the series here:
If you’re 22 right now, chances are either your parents or grandparents are “Baby Boomers” – members of the generation born between 1946-1964. These Post-WWII babies came of age during the 60s and 70s, years of turbulence and change. One of those changes happened in 1978, when Congress passed a revenue tax that, among other things, created what we now know as 401(k) plans. That means the oldest members of this generation were 32 when this revolutionary retirement-savings tool was introduced; the youngest members were still young teens.
So maybe it isn’t surprising that the Boomers – who didn’t grow up hearing about 401(k) plans and other retirement savings options on a regular basis – are now facing a major retirement crisis. According to many reports, the average Boomer on the verge of retirement has between $25,000-$100,000 in their 401(k), a paltry sum when you consider that retirees are living longer than ever.
Why does this matter to you, as a 22-year-old? Because, and I’m taking a shot in the dark here, you probably don’t want to end up broke in what are supposed to be your “Golden Years.”
The path to a financially stable retirement starts young – in fact, the younger the better. Play around with this investment calculator (there are many like this out there on the Internet, but this is my favorite), and you’ll see that starting to invest in your early 20s as opposed to early 30s can have a monumental impact on your savings down the road.
Why is 22 the perfect age to start a 401(k) account? Because many Americans – particularly the increasingly large college-educated cohort – will start their first full-time job upon graduation at, roughly, age 22. And when you’re negotiating that first job, you should do it with your future investments in mind.
Here’s what I mean by that:
Say you’re offered a job paying $35,000 a year and health benefits. Now another company offers you $32,500 a year plus health benefits AND a 401(k) employer match.
On first glance, you might take the higher salary and be happy with it. But depending on your employer match – and how much money your budget allows you to put into that 401(k) account – you might be leaving money on the table. An employer match can be a very lucrative option that, because of a whole bunch of complicated tax policies that at age 22 I’m pretty sure you don’t care about (but if you do, click here), doesn’t cost the company all that much money but still has a large benefit for you.
So my advice to all you 22-year-olds (or anyone who just starting their first full-time “adult” job): if you have the option to start a 401(k) plan through your employer, do it. Save early, save often. And if you don’t have the option to start a 401(k) plan at work, be sure to set aside money on your own – whether by funding an emergency account or starting a Roth IRA – so you don’t fall behind.
Trust me, your 65-year-old self will thank you for it.