Retirement planning 101 for young people

I am asked often what young people can do now to start building for a secure retirement. The question itself is a great start – frankly, I never gave this much of a thought until I was well past 40.

I have five short answers.

First: start saving as soon as you can – even if you can’t contribute much. You will benefit over time from the benefit of compounding.

Second: don’t believe the bunk about the looming disappearance of Social Security. It will be there for you.

Third: pay close attention to the fees that you are charged on retirement saving, and do your best to keep them at rock bottom.


Fourth: never work with a retirement planner who is not a fiduciary. These are the folks who have a legal obligation to put your interests first, not their own.

Fifth: If you are carrying high-interest student loan debt, take it easy on the retirement saving. Retiring the debt should be a high priority; consider contributing to your workplace 401(k) only enough to capture a matching employer contribution (more on that below).

Now for some longer answers.

Start early. Nothing will have a greater impact on your success as a retirement investor, due to the effects of compound returns over time. This likely will be true even if you start small and even if there are bumps in the road. The early start is especially effective if you’re worried about how much you can set aside.

Vanguard Investments published a research report a couple years ago that tested scenarios and investment strategies for investors age 25, 35 and 45, aiming for a retirement age of 65. The investor who starts at age 25 with a moderate investment allocation and contributes 6 percent of salary will finish with 34 percent more in her account than the same investor who starts at 35 – and 64 percent more than an investor who starts at 45. Put another way, the 35-year-old would need to boost her contribution rate to 9 percent to achieve the same result as the 25-year-old starter who was saving 6 percent.

You can test this out for yourself using this calculator at Vanguard’s website. Simply enter your age, current retirement savings, and how much you’re saving each month. The calculation will show you how much you’ll have saved at age 65, and how much you’d be able to withdraw at a safe rate each month. If you increase the savings even by a small amount and recalculate, you’ll see how much more you could have – mainly because you’re starting young.

Save as much as you can. Along with the benefit of compounding, a higher contribution rate is especially useful if you’re scared by stock market risk and prefer a less aggressive portfolio. The Vanguard study found that a retirement saver starting at 25 saving 9 percent of salary annually with a moderate allocation finished with 13 percent more than by contributing 6 percent in an aggressively-invested account.

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