Saving for retirement in your 20s can be a challenge.
If you’re a Millennial, you may be like many who are dealing with record student loan numbers and a poor wage climate. We see reports indicating younger individuals aren’t investing in the stock market because they don’t feel they have the funds to do so, or aren’t comfortable investing and don’t know how to start.
In many cases, it doesn’t have to be that way. If you want to start saving for retirement but have no idea how, here are four foolproof tips to follow.
Start Small if Need Be
Many believe they don’t have enough to start saving for retirement. A recent Bankrate report shows a majority of Millennials don’t invest for one reason – lack of funds. We believe we need a lot to start saving for retirement, and that’s simply not the case. Having a small amount to invest shouldn’t be a source of shame. Just the act of starting, especially when you’re young, should be a source of confidence, as time will grow your money.
The simplest place to start saving is through an employer-sponsored 401(k) plan. You can have money taken out of each paycheck, on a pre-tax basis, and put aside for retirement. What if you don’t have access to a 401(k)? “Not having access to a 401(k) to me isn’t a concern. There are other investment products that can help people build wealth and retirement,” says Melissa Schreur, Certified Insurance Counselor of Insure the Heroes. As Schreur says, there are many other options if you don’t have access to a 401(k) plan from online brokerages with low initial minimums to the MyRA.
Another leading reason for a lack of investing among younger individuals is an absence of comfort. We make investing in the stock market more difficult than it needs to be, leading many to inaction. Thankfully there are many options today that make investing relatively simple even for the most novice individuals.
The growth of the robo-advisor space has opened avenues for investors to get access to services once offered only to those with means. They follow sound ideals and manage your portfolio to ensure it’s on target with your goals. In many cases, robo-advisors have minimal requirements, making them a desirable option when you’re beginning to invest.
Another option are Target-Date Funds (TDFs) that effectively manage the makeup of your investments. “Today you can purchase a target date retirement fund, set up automatic contributions and you will never have to touch your account until retirement. Target date funds automatically reduce risk over the years by lowering exposure to riskier investments such as stocks and international stocks and increase exposure to ‘safe’ assets like bonds,” says Matt Hylland, CFP®, of Hylland Capital. If done wisely, you really can’t go wrong in pursuing one of those two options to start investing.
Budget for It
Living on a budget is one of the best ways to start saving for retirement on limited funds. Even if you have limited funds, it can be easy to rationalize spending and spend more than you earn. A budget will help you monitor priorities and hold yourself accountable for putting money towards retirement, especially if you view it as a payment to your future self.
This begs the question of where investing for retirement should be in light of other priorities. “I argue that retirement planning should be very high on your to-do list compared with other financial needs,” says Hyland. We think saving will be easier when we’re older, but that’s not the case. The time to start is now and having a budget helps you accomplish that. Hyland adds one other word of caution, “Before starting to save aggressively; I would recommend an emergency fund be in place. The last thing you want is to be caught up in debt because of an unfortunate circumstance. Build up a decent emergency fund, so that your money saved for retirement can be left to grow uninterrupted.”
Education is the great equalizer when it comes to investing. Those who lack knowledge may be more prone to delay investing. Thankfully there are many resources available to help teach the basics of investing and in many cases, they’re free to use. The Internet is full of resources to help you become more knowledgeable about investing – in addition to a wealth of books on the subject. If you have a 401(k) plan many of those offer free resources as do a number of online brokerages. Find a resource that’s easy to understand and you’ll be surprised at how little you actually need to know to start.
Saving for retirement seems so far off that it’s easy to convince ourselves we don’t need to start. Don’t lull yourself into inaction, as it really doesn’t take that much to start.