What to Do in Your 20s to Retire at 65

It’s fun to think about life in retirement. Trips around the world, endless rounds of golf, winters on a hot beach, and of course, zero-hour work weeks.

But how will you pay for it all?

Saving six or seven figures for retirement doesn’t happen overnight. To live the retirement of your dreams, you must take action when you’re young.

Here are habits you must build and actions you need to take in your 20s to be free to retire at 65.

Estimate How Much You’ll Need to Retire

Calculating the stack of cash that you’ll need to retire can be tough to figure out. In your 20s, retirement feels so far away that it’s hard to imagine what life will even be like in 40 or so years.

Putting daydreaming aside, most recommendations say that you’ll need about 80%-100% of your final job salary to live on each year in retirement. Of course, you’ll have to multiply that by how many years you expect to live.

You can test out retirement calculators to give you an even more clear idea of how much you may need. This TD Ameritrade retirement calculator will help you with how much you’ll need to save while this calculator from CNN Money will evaluate your savings plan so you can make adjustments.

Of course there’s no substitue for expert advice, so meet with a financial planner to get the real details on your personal circumstances.

Start Investing Early

When others tell you to “start investing early,” they’re not just saying so because it’ll save you the trouble of thinking about it later. There’s a real reason behind it, and that is the amazing power of compounding returns.

You see, the sooner you put money into your retirement accounts, the sooner you can start earning a return on your investment. When you start young, your investments have a chance to increase in value sooner, making compound returns a powerful force on your side.

To put it into numbers:

• Investing $10,000 from age 25 to 65 at a 8% annual return yield about $217,000.
• Wait ten years and invest at age 35? You’ll only have $101,000 when you’re ready to retire at 65. That’s less than half the amount just by waiting ten years longer!

While you might not have a lot to put away for retirement in your 20s, realize that every dollar you can invest will be all the more powerful now than it will be in the future. Live as cheaply as you can, and work to start investing at least 10% of your salary every year, beginning with your first paycheck.

Invest More Aggressively

In your 20s, you’ll have the luxury of decades until you’ll need to draw on that money to retire. A drop in value due to fluctuations in the stock market at age 25 doesn’t mean you can’t retire, but you might be in more trouble if this happens when you’re 65.

Since risk is less threatening in your 20s, you can afford to be more aggressive with your investments.

Consider allocating your funds into a higher proportion of stocks or stock funds. Some experts recommend putting as much as 80% of your money into these higher-risk investments. This doesn’t mean you should be reckless, of course. If you’d rather not deal with these types of funds yourself, you can still invest in lifecycle funds that will make a similar allocation for you.

Take Advantage of Employer and Tax Benefits, Every Year

If you’re lucky enough to benefit from your employer’s 401(k) program, make sure to never miss out on matching programs. If your employer offers to match any of your retirement contributions, do all that you can to grab this free money.

For retirement tax savings, look to Individual Retirement Accounts (IRAs). Roth IRAs have a yearly cap, currently set at $5,000 for qualifying individuals, that you can put into an account. If you can afford to take full advantage of this retirement benefit every year in your 20s, you’ll be in great shape to withdraw a small fortune (remember: compounding returns) tax-free in retirement.

Negotiate Your Starting Salary

Before you’re ready to jump at any salary just to get any job, don’t accept without negotiating first. Your first salary is important, and all future raises may be a percentage of this amount. The higher you start, the quicker your salary grows.

Always let your potential employer make the first offer. Even if it’s higher than you expected, counter with a higher amount and expect to meet in the middle of both numbers.

Take Care of Credit

Wrecking your credit by skipping payments, maxing out credit cards, or defaulting on loans has long-lasting impact on both your credit score and your ability to get new loans.

You may be looking to buy a home within the next decade, but crushing your credit score by making mistakes will make getting a mortgage much tougher. The best case is you’ll pay a higher interest rate due to your low credit score, meaning you’ll owe much more over the life of the loan.

Be responsible with your credit. If it’s already damaged, follow steps to raise your score.

Pay Off Debt When it Makes Sense

Determining when to pay down debt and when to invest your money is a tricky calculation.

When in doubt, consider getting rid of your high-interest debt, like credit card balances and private student loans, as soon as you can afford to. These debts are almost certainly costing you money in interest, and the stress of making monthly payments might be getting to you, too. Don’t carry these types of debt with you into your 30s. Get rid of them, and never look back.

No doubt, planning and saving for retirement is a lot of work with many steps. The key is to start now, even if you need to start slowly. Your future self will be happy that you did.