Retirement Planning in Your 20s

I am a huge believer that the earlier you start saving for retirement, the better.  Compound interest is a wonderful thing.  I personally couldn’t start saving until I took my first job out of college, at age 22.  Now I am 28 and here are a few tips I’d suggest for retirement planning in your 20s.

Retirement Plan#1 – 401(k)

Do not leave free money on the table!  Please!  If your job offers any matching at all on a 401(k), at least contribute the minimum to get the maximum company match.  My job offered 50% matching on up to 6% when I first started and is now match 100% up to 6%, so I have always contributed 6%.  I would contribute more, but I decided to branch out to a Roth IRA instead.

Retirement Plan#2 – Roth IRA

A Roth IRA is great for diversification in my opinion.  A 401(k) will be taxed when you make withdrawals in retirement since you contribute pre-tax money.  A Roth IRA is not taxed when you make withdrawals in retirement since you have already been taxed on the money you contribute.  Currently my husband and I can each have a Roth IRA and contribute $5000 apiece to them a year.

When we retire, we hope to be able to take the maximum we can from the 401(k) or 403(b) (the equivalent for teachers) for a certain tax bracket.  Once our withdrawals hit the ceiling for a low tax bracket, we will take the rest of what we need from the Roth IRAs.  That is the plan for us after age 60.

Retirement Plan#3 – Individual Investments

Since we do plan to retire early at around age 52, we will need money to use for that 8 years before we touch the retirement accounts.  I know that we can withdraw what we contributed to the Roth IRAs without suffering a penalty, but we rather let compound interest work its magic for as long as possible.  So we are planning to afford those 8 bridge years with the cash we invest through Scottrade in individual stocks.  Specifically, my husband invests $2500-$5000 a year in high dividend stocks like Johnson and Johnson and 12 others right now.

Retirement Plan#4 – Pension

Not many jobs offer pensions anymore, but my husband is a public school librarian and was a science teacher before that.  He will supposedly get a full pension after 30 years of teaching, which is when we are 52.  We will see.  If you have the opportunity to get a job you love that offers a pension plan, I’d suggest jumping on it.

Did I miss any big parts of early retirement planning?  For all of the readers over their 20s, what are the next steps that we should look into?  For those of you still in your 20s, am I missing any big parts?

Edwin C

Edwin is a marketer, social media influencer and head writer here at Money In The 20's. He manages a large network of high quality finance blogs and social media accounts. You can connect with him via email here.

5 thoughts on “Retirement Planning in Your 20s

  • June 30, 2011 at 3:25 pm
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    The money in taxable account do not have to be individual stocks, in fact I would prefer to put index funds in the taxable account and dividend stocks in my Roth. Also, you can get I bonds for part of your EF and that can help carry you before you can remove money from your 401k/IRA. I bonds are not taxed by the state, just feds so that can help stretch your money.

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  • July 6, 2011 at 12:50 pm
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    It is so important for young adults to start planning retirement as soon as they have a stable cash flow. It’s crazy how little you have to save each year when you start early. Unfortunately, I just got my first full-time job at the age of 27 so I am a few years behind, but I’m also a savvy investor so I am convinced that I will be able to retire the way I want.

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  • July 17, 2011 at 2:33 pm
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    Hi,

    Firstly thanks for a fun and interesting blog. As an advisor to the Swedish public via my own site on the matters you talk about, I totally agree when you state: the earlier the better when it comes to start saving for your retirement. Not many people think like this, although they should. Keep up the good work! Best regards..

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  • July 22, 2011 at 4:35 pm
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    New reader, love the blog!

    My husband and I are both 25 and working full time. Our retirement planning is in full gear. My husband is a police officer and will retire with a fabulous pension. On top of that, we contribute about 500 a month to a combo of an RRSP/TFSA for him.

    I won’t retire with a pension, but I have a 401(k) with work, where they match whatever I put in, up to 5% of my salary. So jumped right on that. I also have my own RRSP/TFSA that we contribute whatever leftover money we have.

    We plan on retiring as early as possible – so are really focused on planning and saving. Our big focus though is getting our house paid off and we hope to have it fully paid off in <10 years.

    It's hard to know what the balance is.. re: retirement planning vs. mortgage payments.

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  • August 11, 2011 at 2:03 pm
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    I think it’s important to start on a retirement plan early. My 401K took a hit the past 2 years. I talked to several financial investors. Tried a few strategies but finally found one that worked for me. Right now I am into annuities and got a strategy from Annuity Rates . So anyone interested in a sound retirement plan should definitely check them out. Good luck!

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