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?