I still remember the first big paycheck from my first job right out of college. The amount on the check was more money than my car was worth. I couldn’t wait to spend it. I was 22, and retirement was the last thing on my mind. I wanted to go out with my friends and hit the town. I wanted to get a new car because my 17-year-old Toyota didn’t impress the ladies. At 22, I was worn out from five years of living the poor student lifestyle.
That first paycheck was great, and I expected many more in the coming years. I’m sure most of us had a similar feeling when we were younger. When you’re 22, you’d rather spend the money and then earn more. However, that’s a mistake. Everyone needs to think about retirement right at the beginning of their career. Here’s why the best time to save for retirement is in your 20s:
Get used to saving and investing. The first few paychecks can determine how you save for the rest of your career. If you spend everything for six months, then you’ll get used to a certain lifestyle and it will be very difficult to cut back. But if you save and invest a large portion of your paycheck, then you won’t even miss it. Luckily, my dad convinced me to invest in the company 401(k) plan. They took the contribution right out of my paycheck so I didn’t even see that in the bank. My paychecks were reduced, but it wasn’t a big deal because it was still a lot more money than I ever made as a college student.
Compounding. Getting an early start with investing can make a huge difference in how much you will have when you retire. If you invest $300 per month when you’re 25 and subsequently earn 8 percent each year, then you will have over $1 million by the time you’re 65. If you wait until 35 to start investing $300 each month, then you’ll have about $440,000. That’s less than half has much as you would have if you had started saving the same amount a decade earlier.
Learn how to invest. Most of us are not very good investors. Many people buy stocks when prices are high and panic and sell when the stock market crashes, which is the worst possible time to do both. It takes time to learn how to invest the right way, and the earlier you start investing, the faster you’ll figure it out.
In 1999, I purchased tech stocks on margin (borrowed money), and we all know how that turned out. Unless you go to business school or read a lot of investment books, then you won’t know much about asset allocation, rebalancing or other investing fundamentals when you’re 22. By investing early, you’ll have time to learn and recover from your mistakes.
401(k)s and Roth IRAs. Retirement accounts have significant advantages over regular brokerage accounts. My old 401(k) plan had company matching. That’s free money that everyone needs to take full advantage of. You don’t want to leave any money on the table. The tax is also deferred on the contribution, so you’ll also reduce your tax bill every year.
The Roth IRA is a post-tax investment, and you won’t have to pay tax on the earnings when you withdraw the money in retirement. You may also be eligible to withdraw your contributions at any age with no penalty.
Payroll deduction makes these retirement accounts easy to contribute to. And the earlier you start retirement account contributions, the better off you’ll be in retirement. You might be able to get extra money from your employer, save on taxes and take advantage of compounding. What’s not to like?
Your career may not last. Nobody ever thinks about career longevity when they start their first job. I enjoyed my engineering job when I first started, but a lot changed over 16 years. The job changed, my family situation changed and it wasn’t the right fit anymore. When you’re young, you should talk to older coworkers in your company to see if they still like their job. Lawyers, engineers, physicians and many other careers have high stress and people burn out in those fields all the time. Companies also lay off older, highly compensated workers at the first sign of a recession. Companies may not be loyal to long-term employees, so you have to save up and take care of yourself.
I’m very thankful to my dad for convincing me to save and invest early. I made a lot of investing mistakes in the past, but I was able to recover because I had a lot of time. Now that I’m older, I’m a bit more conservative and I make fewer mistakes. My career wasn’t the right fit anymore, and I was able to leave without too much financial stress because I started investing very early. Even if you love your job, you need to prepare for bumps in the road by investing early.